Financial reporting quality of Chinese reverse merger firms: The reverse merger effect or the weak country effect?

Kun Chih Chen, Qiang Cheng, Ying Chou Lin, Yu Chen Lin, Xing Xiao

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In addition, we find that compared with Chinese ADR firms, Chinese RM firms have weaker bonding incentives (as measured by CEO turnover-performance sensitivity) and poorer corporate governance. These factors, in turn, contribute to the lower financial reporting quality of Chinese RM firms. Overall, our results suggest that the less scrutinized RM process allows the Chinese firms with weak bonding incentives and poor governance to gain access to U.S. capital markets, resulting in poor financial reporting quality.

Original languageEnglish
Pages (from-to)1363-1390
Number of pages28
JournalAccounting Review
Volume91
Issue number5
DOIs
Publication statusPublished - 2016 Sep

Fingerprint

Country effects
Mergers
Financial reporting quality
Chinese firms
Incentives
Corporate governance
CEO turnover
Governance
China
Capital markets
Legal enforcement
Investor protection
Factors

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Chen, Kun Chih ; Cheng, Qiang ; Lin, Ying Chou ; Lin, Yu Chen ; Xiao, Xing. / Financial reporting quality of Chinese reverse merger firms : The reverse merger effect or the weak country effect?. In: Accounting Review. 2016 ; Vol. 91, No. 5. pp. 1363-1390.
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Financial reporting quality of Chinese reverse merger firms : The reverse merger effect or the weak country effect? / Chen, Kun Chih; Cheng, Qiang; Lin, Ying Chou; Lin, Yu Chen; Xiao, Xing.

In: Accounting Review, Vol. 91, No. 5, 09.2016, p. 1363-1390.

Research output: Contribution to journalArticle

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