Comparing the Financial Reporting Quality of Chinese and U.S. Public Firms

This paper investigates whether U.S. regulatory actions around reverse mergers have exerted any spillover effects on the Chinese firms listed in China and whether Chinese firms have exhibited lower financial reporting quality than their U.S. counterparts. To test the possible spillover effect, this paper calculates three-day cumulative average abnormal returns (CAAR) and the aggregate CAAR for a series of U.S. regulatory actions in 2010 and 2011. The study then compares the accrual quality, conditional conservatism, and information content of accruals of Chinese firms and U.S. firms. The paper documents a spillover effect of U.S. actions against reverse mergers on Chinese stocks listed in China. Overall results do not support the perception that Chinese firms have lower financial reporting quality than their U.S. counterparts. While this study provides evidence consistent with investors perceiving poor financial reporting quality among Chinese firms, that perception is not justified by empirical evidence. This study provides a comparison of the financial reporting quality between Chinese and U.S. firms to help global investors assess information risk for optimal resource allocation