Brattle Principal Torben Voetmann has co-authored a paper published in the Quarterly Journal of Finance that analyzes the litigation risk of Chinese firms listed in the U.S. The paper, “Private Class Action Litigation Risk of Chinese Firms Listed in the U.S.,” was co-authored by Jan Jindra of the U.S. Securities and Exchange Commission and Ralph A. Walking of Drexel University.
The authors explain that the firm-specific characteristics from prior literature studying U.S. firms are not correlated with the litigation risk of U.S. listed Chinese firms. However, the authors’ 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). Additionally, they find that the 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.
The paper concludes that the litigation risk differential is consistent with René M. Stulz’s hypothesis in “Globalization of Equity Markets and the Cost of Capital,” where 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.
The publication can be downloaded here.