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Auditor choice in reverse mergers: Evidence from China

Author

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  • Xia, Yanchun
  • Wong, Sonia
  • Xin, Qingquan

Abstract

Using data from 123 reverse mergers (RMs) in China, this study investigates the determinants and economic consequences of auditor choice in RMs. We find that the choice of a new auditor instead of the incumbent auditor is not related to auditor competence but to the relative bargaining power of RM firms and publicly listed firms (shell firms), and that the probability of choosing new auditors is higher when RM firms have more bargaining power relative to shell firms. We also find that hiring new auditors in the RM is associated with a higher valuation of injected assets and higher pre-listing income-increasing discretionary accruals in RM firms. Furthermore, post-merger firms exhibit drops in accounting performance and firm value and are more likely to restate their financial reports within 3 years of listing when new auditors are appointed in RMs. Finally, the cross-sectional test shows that this effect mainly exists in the context of RMs where the newly appointed auditor is a non-Big 10 auditor and a non-specialist auditor. Overall, our results emphasize the role of RM firms and shell firms in auditor choice for RMs and highlight the implications of such a joint decision on investor protection.

Suggested Citation

  • Xia, Yanchun & Wong, Sonia & Xin, Qingquan, 2024. "Auditor choice in reverse mergers: Evidence from China," The British Accounting Review, Elsevier, vol. 56(2).
    • Handle: RePEc:eee:bracre:v:56:y:2024:i:2:s0890838923000902
    DOI: 10.1016/j.bar.2023.101243
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    More about this item

    Keywords

    Reverse merger; Auditor choice; Accounting performance; Valuation; Audit quality;
    All these keywords.

    JEL classification:

    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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