Do Investors Care About Earnings Quality? The Case of Chinese Reverse Mergers

This study examines a panel of U.S.-listed Chinese reverse merger firms to address the question whether, and to what extent, earnings quality is valued by investors. Empirical evidence indicates that U.S.-listed Chinese reverse merger firms tend to have much lower earnings quality as compared to both U.S.-listed Chinese IPO firms and ADR firms, as measured by both the absolute value of discretionary accruals and the accruals quality. This fundamental difference, however, is reflected in neither firm valuation nor stock performance, suggesting that investors do not pay enough attention to the integrity of financial information of foreign listings in general and reverse merger firms in particular