Advertisement

Review of Quantitative Finance and Accounting

, Volume 52, Issue 1, pp 159–196 | Cite as

Are investors always compensated for information risk? Evidence from Chinese reverse-merger firms

  • Yenn-Ru Chen
  • Mi-Hsiu Chiang
  • Chia-Hsiang Weng
Original Research
  • 178 Downloads

Abstract

Using a data sample of 93 Chinese reverse-merger (CRM) firms listed in the U.S. over the period from 2000 to 2011, we find supporting evidence of poorer financial reporting quality exhibited by CRM firms relative to their respective US counterparts. Our main result indicates that while poor financial reporting quality induces information risk/asymmetry, higher (lower) information risk fails to be associated with higher (lower) expected returns. In contrast with prior studies that document information risk as non-diversifiable and a priced risk factor, the value relevance of the CRM firms’ financial reporting quality, in terms of information asymmetry-based premiums, is found to be remote.

Keywords

Information risk Financial reporting quality Reverse mergers Valuation 

JEL Classification

G14 G34 M41 

References

  1. Ang J, Jiang Z, Wu C (2016) Good apples, bad apples: sorting among Chinese companies traded in the US. J Bus Ethics 134(4):611–629Google Scholar
  2. Beatty RP, Ritter JR (1986) Investment banking, reputation, and the underpricing of initial public offerings. J Financ Econ 15(1):213–232Google Scholar
  3. Bens DA, Monahan SJ (2004) Disclosure quality and the excess value of diversification. J Account Res 42(4):691–730Google Scholar
  4. Booth JR, Smith RL II (1986) Capital raising, underwriting and the certification hypothesis. J Financ Econ 15(1):261–281Google Scholar
  5. Bradshaw MT, Miller GS (2008) Will harmonizing accounting standards really harmonize accounting? Evidence from non-US firms adopting US GAAP. J Account Audit Finance 23(2):233–264Google Scholar
  6. Bushman R, Chen Q, Engel E, Smith A (2004) Financial accounting information, organizational complexity and corporate governance systems. J Account Econ 37(2):167–201Google Scholar
  7. Carhart MM (1997) On persistence in mutual fund performance. J Finance 52(1):57–82Google Scholar
  8. Carter R, Manaster S (1990) Initial public offerings and underwriter reputation. J Finance 45(4):1045–1067Google Scholar
  9. Carter RB, Dark FH, Singh AK (1998) Underwriter reputation, initial returns, and the long-run performance of IPO stocks. J Finance 53(1):285–311Google Scholar
  10. Chemmanur TJ, Fulghieri P (1994) Investment bank reputation, information production, and financial intermediation. J Finance 49(1):57–79Google Scholar
  11. Chen S, Shevlin T, Tong YH (2007) Does the pricing of financial reporting quality change around dividend changes? J Account Res 45(1):1–40Google Scholar
  12. Chen C, Gotti G, Herrmann D, Schumann K (2015) Earnings quality of foreign versus US reverse mergers: geographical location or firm-level incentives? J Int Account Res 15(1):49–66Google Scholar
  13. Chen K-C, Cheng Q, Lin YC, Lin Y-C, Xiao X (2016) Financial reporting Quality of Chinese reverse merger firms: the reverse merger effect or the China effect? Account Rev 91(5):1363–1390Google Scholar
  14. Daniel K, Titman S (1997) Evidence on the characteristics of cross-sectional variation in stock returns. J Finance 52:1–33Google Scholar
  15. Daniel K, Grinblatt M, Titman S, Wermers R (1997) Measuring mutual fund performance with characteristic-based benchmarks. J Finance 52:1035–1058Google Scholar
  16. Dechow PM, Dichev ID (2002) The quality of accruals and earnings: the role of accrual estimation errors. Account Rev 77(s–1):35–59Google Scholar
  17. Dechow PM, Sloan RG, Sweeney AP (1995) Detecting earnings management. Account Rev 69(1):193–225Google Scholar
  18. Drobetz W, Grüninger MC, Hirschvogl S (2010) Information asymmetry and the value of cash. J Bank Finance 34(9):2168–2184Google Scholar
  19. Dunbar CG (2000) Factors affecting investment bank initial public offering market share. J Financ Econ 55(1):3–41Google Scholar
  20. Duru A, Reeb DM (2002) International diversification and analysts’ forecast accuracy and bias. Account Rev 77(2):415–433Google Scholar
  21. Easley D, O’Hara M (2004) Information and the cost of capital. J Finance 59(4):1553–1583Google Scholar
  22. Fama EF, French KR (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33(1):3–56Google Scholar
  23. Fama EF, French KR (2015) A five-factor asset pricing model. J Finance Econ 116(1):1–22Google Scholar
  24. Francis J, LaFond R, Olsson P, Schipper K (2005) The market pricing of accruals quality. J Account Econ 39(2):295–327Google Scholar
  25. Gilson SC, Healy PM, Noe CF, Palepu KG (2001) Analyst specialization and conglomerate stock breakups. J Account Res 39(3):565–582Google Scholar
  26. Givoly D, Hayn C, Lourie B (2014) Importing accounting quality: the case of foreign reverse mergers. Working paper, Pennsylvania State UniversityGoogle Scholar
  27. Glosten LR, Milgrom PR (1985) Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. J Financ Econ 14(1):71–100Google Scholar
  28. Grossman SJ, Stiglitz JE (1980) On the impossibility of informationally efficient markets. Am Econ Rev 70(3):393–408Google Scholar
  29. Healy PM, Palepu KG (2001) Information asymmetry, corporate disclosure, and the capital markets: a review of the empirical disclosure literature. J Account Econ 31(3):405–440Google Scholar
  30. Heckman JJ (1976) The common structure of statistical models of truncation, sample selection and limited dependent variables and a simple estimator for such models. Ann Econ Soc Meas 5(4):475–492Google Scholar
  31. Jenkinson T, Ljungqvist A (2001) Going public: the theory and evidence on how companies raise equity finance. OUP CatalogueGoogle Scholar
  32. Jindra J, Voetmann T, Walkling RA (2012) Reverse mergers: the Chinese experience. Working paper, Ohio State UniversityGoogle Scholar
  33. Jones JJ (1991) Earnings management during import relief investigations. J Account Res 25(1):193–228Google Scholar
  34. Kothari SP, Leone AJ, Wasley CE (2005) Performance matched discretionary accrual measures. J Account Econ 39(1):163–197Google Scholar
  35. Krishnaswami S, Subramaniam V (1999) Information asymmetry, valuation, and the corporate spin-off decision. J Financ Econ 53(1):73–112Google Scholar
  36. Kumar P, Sorescu SM, Boehme RD, Danielsen BR (2008) Estimation risk, information, and the conditional CAPM: theory and evidence. Rev Financ Stud 21(3):1037–1075Google Scholar
  37. Lambert R, Leuz C, Verrecchia RE (2007) Accounting information, disclosure, and the cost of capital. J Account Res 45(2):385–420Google Scholar
  38. Lee G, Masulis RW (2011) Do more reputable financial institutions reduce earnings management by IPO issuers? J Corp Finance 17(4):982–1000Google Scholar
  39. Lee CM, Li KK, Zhang R (2014) Shell games: the long-term performance of Chinese reverse-merger firms. Account Rev 90(4):1547–1589Google Scholar
  40. Leuz C (2006) Cross listing, bonding and firms’ Reporting Incentives: a discussion of Lang, Raedy and Wilson (2006). J Account Econ 42(1):285–299Google Scholar
  41. Mao J, Ettredge M (2015) Internal control deficiency disclosures among Chinese reverse merger firms. Working paper, University of Texas at San AntonioGoogle Scholar
  42. OECD (2010) OECD economic surveys: China 2010. OECD Publishing, Paris.  https://doi.org/10.1787/eco_surveys-chn-2010-en Google Scholar
  43. O’Hara M (2003) Presidential address: liquidity and price discovery. J Finance 58(4):1335–1354Google Scholar
  44. Pollard T (2016) Sneaking in the back door? An evaluation of reverse mergers and IPOs. Rev Quant Finance Account 47(2):305–341Google Scholar
  45. Teoh SH, Welch I, Wong TJ (1998) Earnings management and the underperformance of seasoned equity offerings. J Financ Econ 50(1):63–99Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Yenn-Ru Chen
    • 1
  • Mi-Hsiu Chiang
    • 1
  • Chia-Hsiang Weng
    • 2
  1. 1.National Chengchi UniversityTaipeiTaiwan
  2. 2.Hong Kong Polytechnic UniversityKowloonHong Kong

Personalised recommendations