Intangible investments and voluntary delisting. Mass exodus of Chinese firms from US stock exchanges

• Published date: 07 May 2019
• DOI: https://doi.org/10.1108/IJAIM-12-2017-0146
• Date: 07 May 2019
• Pages: 224-243
• Author: Henry Agyei-Boapeah,Yuan Wang,Abongeh A. Tunyi,Michael Machokoto,Fan Zhang

Intangible investments and

voluntary delisting

Mass exodus of Chinese firms from US

stock exchanges

Henry Agyei-Boapeah and Yuan Wang

The Accounting and Finance Group, Management School, University of York,

York, North Yorkshire, UK

Abongeh A. Tunyi

Accounting and Financial Management Division, Management School,

University of Sheffield, Sheffield, UK

Michael Machokoto

Faculty of Business and Law, The University of Northampton,

Northampton, UK, and

Fan Zhang

Accounting and Finance Group, Business School,

Liverpool John Moores University, Liverpool, UK

Abstract

Purpose –Drawing on a cost–benefit perspective, this paper aims to explore the relation between

information asymmetry and the decision to delist from stock exchanges during periods of uncertainty.

Specifically,it investigates the role of firms’intangible investmentsand the availability of alternative sources

of finance on the decisionto delist from foreign stock markets.

Design/methodology/approach –The study takes advantage of a natural experiment in which

cross-listed Chinese firms facing uncertainty in US markets because of widespread allegati ons of

accounting fraud decide on whether to remain listed or voluntarily delist. The decision to delist is

modelled as a function of the level of information asymmetry between firms and their stakeholders and

the availability of alternative financing, while controlling for other drivers of firms’delisting decision.

The data used in the empirical analyses cover a hand-collected sample of 91 Chinese firms voluntarily

delisting from US stock markets between 2010 and 2016. This sample is matched with an equal sample

of Chinese firms,whichremainedlistedinUSstockmarketsduringthesameperiod.Aprobitregression

model accounting for fixedeffectsisused.

Findings –There is a significant positive relationshipbetween investments in intangible assets and firms’

decision to delist. Moreover, the positive intangiblesdelisting nexus is accentuated by the availability of

alternative sourcesof financing. Collectively, the results are consistent with the theoreticalargument that the

higher information asymmetry associated with intangible assets mayincrease the cost of staying listed on

stock exchanges,particularly in periods of uncertainty (capturedin this study by accounting fraud allegations

targeting cross-listedfirms). The results have important implications for corporatemanagers, capital market

participantsand policymakers.

Practical implications –Policymakers and standard setters must continue to work to improve the

accounting regulationsof intangible assets and to promote the adoption of global accountingstandard across

both emergingand advanced economies.

Originality/value –The study exploits a uniquenatural experimental setting to explore why cross-listed

firms delist. The underlyingtheoretical framework to explain delisting is new. Thisframework captures the

IJAIM

27,2

224

Received8 December 2017

Revised16 December 2017

Accepted18 December 2017

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 2, 2019

pp. 224-243

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-12-2017-0146

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

role of information asymmetry, uncertainty and alternative financing in explainingthe cost and benefits of

remaininglisted on a foreign market.

Keywords China, Intangible assets, Information asymmetry, US stock exchange,

Voluntary delisting

Paper type Research paper

1. Introduction

The liberalisation of capital markets, as well as technological progress, in recent years has

created new opportunities for firms to seek development and growth beyond their national

borders. Prior studies (Merton, 1987;Stulz, 1999;Errunza and Miller, 2000;Karolyi, 2006;

Bharath and Dittmar, 2010;Eng and Ling, 2012) have explored the motivations of foreign

firms listing in US stock markets.The extant research suggests that foreign firms cross-list

into the US market to gain access to lower cost of capital (Errunzaand Miller, 2000;Bharath

and Dittmar, 2010), greater investor recognition (Merton, 1987) or as a commitment

mechanism to the stricterUS regulations and investor protection rights (Stulz, 1999;Karolyi,

2006;Eng and Ling, 2012). Clearly, besides stricter regulations, there are other costs

associated with listing on more sophisticated markets, most notably, greater information

disclosure requirements (Eng and Ling, 2012) and increased scrutiny by stakeholders such

as analysts and the press. It is unclear, in existing research, how these associated costs

influence delisting decisions, and the case of cross-listed Chinese firms in US markets

provides a natural settingto explore this issue.

The China Securities RegulatoryCommission, established in 1992, allowed Chinese firms

to cross-list. This led to a surge in the number of Chinese firms listing in foreign markets,

particularly in the USA. As in Figure 1, the number of Chinesefirms listing on US markets

increased successively each year from 2001, reaching its peak in 2007. Noticeably, Chinese

firms’listings on US markets significantlyreduced to 11 in 2011, representing a 96 per cent

decline from the previous year. Concurrently, as shown in Table II, a wave of voluntary

delisting also emerged[1]. Recent figures suggest that between 2010 and 2015, there were

over 80 delisting announcements from US stock exchanges involving Chinese firms. This

wave of delisting has been attributed to loss of investor confidence following reports of

fraudulent accountingpractices in some Chinese US-listed firms (Song and Zeng,2012).

Notably, a survey report released by Muddy Waters Research Company in June 2010

suggested that some US-listedChinese firms (e.g. Orient Paper) were involved in fraudulent

financial reporting. Similarly, Citron Research reported accounting fraud and bribery

scandals involving Evergrande Real Estate Group (a high-profile Chinese firm). Even

though these claims were unsubstantiated, Evergrande Real Estate Group lost HK$8bn of

its market value. Arguably, the scrutiny, allegations, exposure and suspicion relating to

Figure 1.

The number of

Chinese firmslisting

on US stock markets

from 1992 to 2016

12

1212212

7

124

911

14

47

23

37

45

11

2

8

14 14

8

0

5

10

15

20

25

30

35

40

45

50

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

US stock

exchanges

225