IDEAS home Printed from https://ideas.repec.org/a/wsi/qjfxxx/v07y2017i01ns2010139216500208.html
   My bibliography  Save this article

Private Class Action Litigation Risk of Chinese Firms Listed in the US

Author

Listed:
  • Jan Jindra

    (U.S. Securities and Exchange Commission, 44 Montgomery Street, San Francisco, CA 94104, USA)

  • Torben Voetmann

    (University of San Francisco, San Francisco, CA 94105, USA3The Brattle Group, San Francisco, CA 94105, USA)

  • Ralph A. Walkling

    (LeBow College of Business, Drexel University, 3141 Chestnut Street, Philadelphia, PA 19104, USA)

Abstract

We analyze the litigation risk of Chinese firms listed in the US. We find that firm-specific characteristics from prior literature studying US firms are not correlated with the litigation risk of US-listed Chinese firms. However, our findings indicate that the method of listing is the only reliable predictor of litigation risk — firms listing via reverse merger are significantly more likely to face lawsuits compared to firms listing via initial public offering (IPO). We find that Chinese reverse merger (CRMs) firms, relative to Chinese IPOs, have lower analyst following, similar post-listing stock performance, higher operating cash flows, smaller size, and lower cash holdings. We conclude that the litigation risk differential is consistent with the bonding hypothesis of [Stulz 1999, Globalization of Equity Markets and the Cost of Capital, Journal of Applied Corporate Finance 12, 8–25], wherein the higher litigation risk of CRMs is a reflection of increased but varying levels of monitoring, starting with the regulatory oversight at the pre-listing stage and a post-listing tradeoff between enforcement and monitoring by shareholders.

Suggested Citation

  • Jan Jindra & Torben Voetmann & Ralph A. Walkling, 2017. "Private Class Action Litigation Risk of Chinese Firms Listed in the US," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-20, March.
  • Handle: RePEc:wsi:qjfxxx:v:07:y:2017:i:01:n:s2010139216500208
    DOI: 10.1142/S2010139216500208
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S2010139216500208
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1142/S2010139216500208?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hanley, Kathleen Weiss & Hoberg, Gerard, 2012. "Litigation risk, strategic disclosure and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 103(2), pages 235-254.
    2. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February.
    3. René M. Stulz, 2009. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 349-390, May.
    4. Mark H. Lang & Karl V. Lins & Darius P. Miller, 2003. "ADRs, Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?," Journal of Accounting Research, Wiley Blackwell, vol. 41(2), pages 317-345, May.
    5. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc.
    6. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    7. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    8. Reese, William Jr. & Weisbach, Michael S., 2002. "Protection of minority shareholder interests, cross-listings in the United States, and subsequent equity offerings," Journal of Financial Economics, Elsevier, vol. 66(1), pages 65-104, October.
    9. Kim, Irene & Skinner, Douglas J., 2012. "Measuring securities litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 290-310.
    10. Susan Chaplinsky, 2010. "Financing under Extreme Risk: Contract Terms and Returns to Private Investments in Public Equity," The Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2789-2820, July.
    11. Frederick Adjei & Ken Cyree & Mark Walker, 2008. "The determinants and survival of reverse mergers vs IPOs," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 32(2), pages 176-194, April.
    12. Walker, Thomas & Turtle, Harry J. & Pukthuanthong, Kuntara & Thiengtham, Dolruedee, 2015. "Legal opportunism, litigation risk, and IPO underpricing," Journal of Business Research, Elsevier, vol. 68(2), pages 326-340.
    13. Arena, Matteo & Julio, Brandon, 2015. "The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(1-2), pages 251-275, April.
    14. Thomas J. Chemmanur & Jie He & Paolo Fulghieri, 2008. "Competition and Cooperation among Exchanges: Effects on Corporate Cross‐Listing Decisions and Listing Standards," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(3), pages 76-90, June.
    15. Floros, Ioannis V. & Sapp, Travis R.A., 2011. "Shell games: On the value of shell companies," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 850-867, September.
    16. Murat Aydogdu & Chander Shekhar & Violet Torbey, 2007. "Shell companies as IPO alternatives: an analysis of trading activity around reverse mergers," Applied Financial Economics, Taylor & Francis Journals, vol. 17(16), pages 1335-1347.
    17. Gleason, Kimberly C. & Rosenthal, Leonard & Wiggins III, Roy A., 2005. "Backing into being public: an exploratory analysis of reverse takeovers," Journal of Corporate Finance, Elsevier, vol. 12(1), pages 54-79, December.
    18. Doidge, Craig, 2004. "U.S. cross-listings and the private benefits of control: evidence from dual-class firms," Journal of Financial Economics, Elsevier, vol. 72(3), pages 519-553, June.
    19. Stephen J. Choi & A. C. Pritchard, 2016. "SEC Investigations and Securities Class Actions: An Empirical Comparison," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 13(1), pages 27-49, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2008. "Internationalization and the evolution of corporate valuation," Journal of Financial Economics, Elsevier, vol. 88(3), pages 607-632, June.
    2. Hail, Luzi & Leuz, Christian, 2009. "Cost of capital effects and changes in growth expectations around U.S. cross-listings," Journal of Financial Economics, Elsevier, vol. 93(3), pages 428-454, September.
    3. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2004. "Look at me now: the role of cross-listing in attracting U.S. investors," International Finance Discussion Papers 815, Board of Governors of the Federal Reserve System (U.S.).
    4. Lucian A. Bebchuk & Michael S. Weisbach, 2012. "The State of Corporate Governance Research," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 325-346, Springer.
    5. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2006. "Look at Me Now: What Attracts U.S. Shareholders?," NBER Working Papers 12500, National Bureau of Economic Research, Inc.
    6. Agapova, Anna & Madura, Jeff & Volkov, Nikanor, 2020. "Information leakage of ADRs Prior to company issued guidance," Research in International Business and Finance, Elsevier, vol. 54(C).
    7. Bianconi, Marcelo & Tan, Liang, 2010. "Cross-listing premium in the US and the UK destination," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 244-259, April.
    8. repec:mth:ijafr8:v:9:y:2019:i:1:p:432-449 is not listed on IDEAS
    9. Smirnova, Elena, 2008. "Depositary receipts and firm value: Evidence from Central Europe and Russia," Emerging Markets Review, Elsevier, vol. 9(4), pages 266-279, December.
    10. Jean-Claude Cosset & Charles Martineau & Anis Samet, 2012. "Do Political Institutions Affect the Choice of the U.S. Cross-Listing Venue?," Cahiers de recherche 1210, CIRPEE.
    11. Cosset, Jean-Claude & Martineau, Charles & Samet, Anis, 2014. "Do political institutions affect the choice of the U.S. cross-listing venue?," Journal of Multinational Financial Management, Elsevier, vol. 27(C), pages 22-48.
    12. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 1-39, October.
    13. Boubakri, Narjess & Cosset, Jean-Claude & Samet, Anis, 2010. "The choice of ADRs," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2077-2095, September.
    14. Michael R. King & Dan Segal, 2004. "International Cross-Listing and the Bonding Hypothesis," Staff Working Papers 04-17, Bank of Canada.
    15. Sarkissian, Sergei & Schill, Michael J., 2012. "The nature of the foreign listing premium: A cross-country examination," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2494-2511.
    16. Ghadhab, Imen, 2021. "Cross-listing and the alignment between short and long-run performance," Journal of Multinational Financial Management, Elsevier, vol. 62(C).
    17. Doidge, Craig & Andrew Karolyi, G. & Stulz, Ren M., 2009. "Has New York become less competitive than London in global markets? Evaluating foreign listing choices over time," Journal of Financial Economics, Elsevier, vol. 91(3), pages 253-277, March.
    18. Imen Ghadhab, 2021. "Cross-listing and crisis," Journal of Asset Management, Palgrave Macmillan, vol. 22(7), pages 539-558, December.
    19. Goergen, Marc & Renneboog, Luc, 2008. "Contractual corporate governance," Journal of Corporate Finance, Elsevier, vol. 14(3), pages 166-182, June.
    20. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2008. "Why do U.S. cross-listings matter?," International Finance Discussion Papers 930, Board of Governors of the Federal Reserve System (U.S.).
    21. Christian Leuz, 2010. "Different approaches to corporate reporting regulation: How jurisdictions differ and why," Accounting and Business Research, Taylor & Francis Journals, vol. 40(3), pages 229-256.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:qjfxxx:v:07:y:2017:i:01:n:s2010139216500208. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/qjf/qjf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.