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- Title
Earnings Quality of Foreign versus U.S. Reverse Mergers: Geographical Location or Firm-Level Incentives?
- Authors
Chu Chen; Gotti, Giorgio; Herrmann, Don; Schumann, Kathryn
- Abstract
We test whether geographical location, audit quality, and equity offering play a role in the earnings quality of reverse merger (RM) firms. We provide evidence that, contrary to the popular focus on foreign reverse mergers by the business press, earnings management is equally likely in both U.S. and foreign RM companies. We find that firm characteristics are more indicative of the likelihood to manage earnings than geographical location. The presence of a Big 4 auditor for RM firms is associated with higher earnings quality and a survival rate almost twice as high in comparison to RM firms audited by a non-Big 4 auditor. Moreover, we find that while earnings management is a common practice at all RM firms, it is especially pervasive for RM firms that are issuing new equity after the reverse merger.
- Subjects
REVERSE mergers; EARNINGS management; FINANCIAL markets; SHELL corporations; PRIVATE companies; UNITED States. Securities &; Exchange Commission
- Publication
Journal of International Accounting Research, 2016, Vol 15, Issue 1, p49
- ISSN
1542-6297
- Publication type
Article
- DOI
10.2308/jiar-51160