US listing of Chinese firms: Bonding vs Adverse Selection

Chinese firms listed in the US have experienced a crisis of accounting irregularities and market crash in 2010 and 2011. Although comparing with their domestic peers, US-listed Chinese IPO firms have stronger fundamental characteristics such as corporate governance and operating institutional environment, those that list through reverse merger have worse fundamental characteristics. These inferior fundamental characteristics are found to be associated with a higher likelihood of committing accounting irregularities after US listing, but the market collapse has punished all the Chinese firms without considering these fundamental characteristics. As a result, there is a trend that firms with stronger fundamental characteristics, which are supposed to gain more from bonding through US listing, are leaving the US market after the crisis. Putting together, the findings suggest that the reverse merger has induced an adverse selection in the US market for Chinese firms.