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

Jan Jindra, Torben Voetmann and Ralph A. Walkling ()
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Jan Jindra: U.S. Securities and Exchange Commission, 44 Montgomery Street, San Francisco, CA 94104, USA
Ralph A. Walkling: LeBow College of Business, Drexel University, 3141 Chestnut Street, Philadelphia, PA 19104, USA

Quarterly Journal of Finance (QJF), 2017, vol. 07, issue 01, 1-20

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.

Keywords: Cross-listings; bonding; reverse merger; initial public offering; litigation risk; private class action lawsuits (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S2010139216500208

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