After 2000, a growing number of foreign firms list in the United States through reverse merger, a non-IPO listing technique that requires less information disclosure. Are the US regulations rigorous enough to deter the listing attempts of weak foreign firms? Using a unique data set, this paper presents the widespread misconduct of Chinese firms that are listed on US exchanges. The firms tend to be US-incorporated reverse mergers that are headquartered in small cities, are audited by small firms, and that change their auditors frequently. Using a social network analysis, I find that the firms are assisted by Western professionals to help them circumvent the US regulations, and they commit fraud and benefit from fast stock sales after listing. Further, I find that the social network of the linked directors facilitates the spread of their misconduct. During the wrongdoers’ listings, the investors in these firms lost at least $811 million. However, the penalties charged to the wrongdoers only accounted for 4.19% of this loss. I also find that the US-listed Chinese firms have a lower average Tobin’s q compared to the China-listed firms, in contrast to the prior research’s findings. These findings contradict the concurrent research that uses the reverse mergers’ financial data, which proves to be unreliable.
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