Reverse Mergers and Earnings Quality

Accrual-based and real activity earnings management at the back door: Evidence from Chinese reverse mergers

“…Our results contrast sharply with those of Chi et al (2011) andZang (2012), who find that Big 4 auditors cannot restrict REM. Our results also add to those of Chu et al (2014), who document that the presence of a Big 4 auditor in RMs is associated with higher financial reporting quality as measured by accrual-based proxies.…”

“…Our paper is closely related to several concurrent studies (Chen et al, 2013;Chu et al, 2014;Givoly et al, 2014) (2007) and uses the signed measure of discretionary accruals to provide a more refined and robust examination.…”

“…Using simulation analysis, they show that even modest correlation between these volatility metrics and the partitioning variable (e.g., the indicator of Chinese RM firms) severely increases the risk of incorrectly rejecting the null hypothesis. In fact, RMs, particularly Chinese RM firms, are found to have higher debt and higher volatility in fundamentals (Adjei et al, 2008;Chu et al, 2014;Gleason et al, 2005;Lee et al, 2013).…”

Cross-Border Reverse Mergers: Causes and Consequences

“…We show, by contrast, that being from China actually has a relatively trivial effect on nearly all governance outcomes we examine; instead, factors such as the year of the reverse merger and the choice of a Big Four auditor are far more important causal variables in corporate governance outcomes among cross-border reverse-merger firms. In a paper that follows ours, Chu et al (2012) present complementary evidence that having a Big Four auditor is associated with less earnings management among reverse-merger firms. 1 In our study, having a Big Four auditor is significantly negatively associated with two out of five earnings management measures.…”

“…less earnings management as Chu et al (2012); we provide evidence for a robust association between having a Big Four auditor and a range of other positive corporate governance outcomes.…”