FINANCIAL REPORTING QUALITY AND ALTERNATIVE ROUTE TO FINANCING: EVIDENCE FROM CHINESE FIRMS SEEKING MAJOR U. S. STOCK EXCHANGE LISTING

摘要

We identify a sample of Chinese firms that went public by merging with U.S. public shell companies between November 7, 2005, and December 31, 2010. We compare this sample of CRM firms with two control samples, a broad set of IPO firms and Chinese IPO firms, and examine two research questions: (1) Why do Chinese firms seeking a major stock listing engage in reverse mergers rather than IPOs to access U.S. capital markets? (2) Do Chinese reverse merger firms achieve the same level of capital market benefits as regular IPO firms? Using accruals-based earnings metrics, we find that CRM firms exhibit lower financial reporting quality than IPO firms. This result is consistent with the notion that firms with inferior financial reporting quality are subject to high adverse selection costs and such costs outweigh the benefits of going public through the conventional IPO channel. We also find that relative to IPO firms, CRM firms have limited access to alternative sources of financing (i.e., rely primarily on short-term borrowings) and are more sensitive to direct costs incurred in the IPO process.