Shades of Gray: Internal Control Reporting by Chinese U.S.-Listed Firms

Abstract

SYNOPSIS Chinese firms listing in the U.S. via reverse mergers (CRMs) have dominated prior media, regulator, and research attention. Yet CRMs have effectively ceased, leaving Chinese firms listing via initial public offerings (CIPOs) as the relevant remaining class of Chinese firms listing on U.S. exchanges. This study documents salient differences between CIPOs, CRMs, and U.S.-domiciled U.S.-listed firms by examining Sarbanes-Oxley Act Section 302 and 404(b) ineffective internal control (IIC) and related disclosures that underlie financial reporting quality, with three main sets of findings. First, both CIPOs and CRMs are more likely to report IICs than U.S.-domiciled counterparts. Second, both CIPOs and CRMs are more likely to under-report IICs than U.S.-domiciled counterparts (CIPO for only 302 disclosures). Third, CIPOs are both less likely to report and less likely to under-report IICs than CRMs. These findings clarify and recast prior characterizations of the internal controls underlying the reporting quality of Chinese U.S.-listed firms. JEL Classifications: G18; G34; G38; M41; M42; M48. Data Availability: All data are available from public sources.