Are Chinese ADRs Tainted by the Poor Audit Quality of Reverse Mergers? The Role of Depositary Banks - Professor Al Ghosh (Baruch College, City University of New York)

Are Chinese ADRs Tainted by the Poor Audit Quality of Reverse Mergers? The Role of Depositary Banks - Professor Al Ghosh (Baruch College, City University of New York)

Date: 8 August 2014 Time: 11.00 am
Venue: RWW315

The controversy over Chinese reverse mergers, which are directly listed on U.S. stock exchanges, has led to concerns about the audit quality of all U.S. listed Chinese companies. Because a sizeable number of foreign firms cross list their shares as American Depositary Receipts (ADRs) issued by U.S. depositary banks (as opposed to directly listed), we study the audit quality of Chinese ADRs.There are several explanations why ADRs may be associated with high audit quality including the positive role of depositary banks and the stringent reporting requirements for ADRs. We find that relative to other ADRs, Chinese ADRs are: (1) less likely to restate prior period financial statements, (2) more likely to be associated with a Big 4 auditor, (3) expected to pay more for their external audits, and (4) likely to have longer audit report lag (proxy for audit investments). When we include Chinese reverse mergers, which are non-ADR companies, we find that the audit quality problems are only confined to Chinese reverse mergers. Our results highlight the beneficial role of depositary banks in guarding U.S. shareholder interests and that the audit quality concerns of Chinese reverse merger companies, or other directly U.S.listed Chinese companies, do not extend to Chinese ADRs.