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Managing earnings at the "back door": Evidence from Chinese reverse mergers

Project Member(s): Shan, Y.

Start year: 2014

Summary: Reverse merger (RM) is a special path for a private operating company to become publicly listed. Recent accounting scandals and frauds of Chinese RMs listed in the US have attracted extensive public attentions and regulator investigations. This project aims to understand the misrepresentation of corporate incomes, namely earnings management, by Chinese RMs. Both earnings management behaviors through accounting choices and via real business activities are examined. It further explores whether prestige auditors effectively alleviate earnings management behaviours of CRMs, and whether earnings management by CRMs impacts the firm¿s future operating performance. The results provide practical implications to regulators and auditors on regulatory considerations to improve market integrity and reporting quality.

Keywords: Reverse merger; earnings management; audit quality

FOR Codes: Accounting, Auditing and Accountability not elsewhere classified, Accounting Theory and Standards, Investment Services (excl. Superannuation), Finance Services