Abstract

Chinese companies listed in the US have come to the attention of securities regulators and have been subject to a large number of securities class actions in recent years. However, China does have relatively stringent governance requirements and maintains a merits review of applications to list in the US, both of which would suggest that the average cross-listed company should perform adequately. Prior evidence from before 2009 suggests that this is the case. This paper extends such evidence to more recent years. The results suggest that Chinese companies listed in the US perform at least as well as their peers and do not have demonstrably worse corporate governance. The results indicate that mainly high quality companies list in the US, potentially reflecting China’s merit’s review of applications to list overseas.


I. Introduction

An increasingly large number of Chinese companies are listing in non-mainland exchanges. Such companies seek to gain access to overseas capital, potentially increase their product-market reach, and signal their quality by bonding to overseas markets’ stringent regulatory requirements. In order to list overseas, firms must obtain the approval of the Chinese Securities Regulatory Commission (CSRC), which conducts a merits review of the firm’s wish to list abroad. However, despite this merits review, a non-trivial number of firms have come under regulatory scrutiny in the US, or have been liable to securities class actions.

China has imposed significant barriers to companies listing abroad. A Chinese company can issue securities only if the CSRC approves it. The CSRC has a wide discretion over whether a company can issue shares abroad. This discretion has advantages and disadvantages. A potential disadvantage is that the CSRC could excessively restrict companies from gaining access to capital. However, the CSRC could also use its discretion to ensure that only well-governed companies list in the US, thereby strengthening China’s corporate reputation. This merits review process also exists within a climate of relatively strong corporate governance.

China has also moved to strengthen corporate governance. In 2002, China adopted a “Code of Corporate Governance for Listed Companies in China”, which mandates independent directors, and directorial elections. They are reportedly comparable with other national standards. In 2006, China adopted the ‘Basic Accounting Standards for Business Enterprises’, which are broadly in line with IFRS. China has also adopted a set of 48 auditing standards, to closer align Chinese auditing practice with that mandated under the International Standards of Auditing. Overall, these significant governance reforms should reduce the likelihood of corporate malfeasance amongst Chinese companies. This should be especially so for companies that list in the US, where the CSRC could use its discretion to prevent poorly governed companies form listing in the US.

There is some prior evidence on the governance of Chinese companies from prior to 2009. However, much of the scrutiny aimed at Chinese companies has been in recent years, with the preponderance of such securities class actions occurring in 2011. This suggests that it is pertinent to analyze further the governance of Chinese companies listed abroad.

Using a sample that spans both before and after the financial crisis (from 1990-2011), I test whether this institutional background actually limits listings in the US to companies who are strongly performing, as measured by their operating performance, governance, and delisting likelihood. I compare Chinese companies with other companies that are listed in the US, and the sub-set of non-US companies that are listed in the US. I use a sample spanning 1990 to 2011.

The results suggest that Chinese companies perform at least as well as their non-Chinese peers. Their operating performance (i.e. ROA) is at least as good as is that of other firms. They are no more likely to delist than are other non-US firms. Their governance attributes (i.e. board independence, number of directors) are not demonstrably different than are those of other firms. The results tend to suggest that it is mainly high quality Chinese companies that list in the US. These results are consistent with the possible efficacy of the merits review approach to cross listing.