| Chinese firms bloomed in the U.S. stock market from2007to2010, but most of their prices plummeted since2011and many of them were delisted from the U.S. market. This paper attempts to answer the following three questions. First, do U.S.-listed Chinese firms have low earnings quality? Second, what are the determinants of earnings quality for U.S.-listed Chinese firms? Third, can U.S. market distinguish Chinese firms with low earnings quality from those with high earnings quality?This paper uses discretionary accruals to measure earnings quality and cross-sectional modified Jones model to calculate discretionary accruals. The empirical result shows that U.S.-listed Chinese firms do have lower earnings quality compared with other U.S.-listed firms. The low threshold of U.S. stock market provides Chinese firms with low quality the opportunity to access its capital. Although IPO firms have higher earnings quality than Reverse Merger firms according to the paired t-test, the difference is not due to the listing method itself. It’s because "Non-Big-Four" audited firms tend to choose reverse merger to get listed, while "Big-Four" audited firms tend to choose IPO method and the later have significant higher earnings quality than the former.Besides, this paper uses probit model and multinomial logistic model to check the U.S. market reaction to Chinese firms. The results indicate that U.S. investors and regulators can’t distinguish different levels of earnings quality effectively. They mainly use listing method, auditors, size and other firm specific characteristics to tell whether a Chinese firm can stay listed in the U.S. market. Furthermore, short-selling becomes an important factor in determining Chinese firms’future. The more serious a Chinese firm is being sold short, the more likely it is delisted. For those voluntary delisting Chinese firms, short-selling is the only different characteristic they have compared with those Chinese firms who remain listed in U.S. market. |
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