Does pedigree matter? Earnings quality of US listed domestic firms via reverse mergers

http://ac.els-cdn.com/S0278425414000684/1-s2.0-S0278425414000684-main.pdf?_tid=1428bd6c-a0c7-11e4-bcce-00000aab0f6b&acdnat=1421773942_e4d24b7227d92a003914d82a20cf45f9

Investigators at Louisiana State University Report Findings in Finance (Does pedigree matter? Earnings quality of US listed domestic firms via reverse mergers)

24 January 2015

Investment Weekly News

2015 JAN 24 (VerticalNews) — By a News Reporter-Staff News Editor at Investment Weekly News — Researchers detail new data in Finance. According to news originating from Baton Rouge, Louisiana, by VerticalNews correspondents, research stated, “This paper examines earnings quality of U.S. domestic firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 to 2011. In order to mitigate confounding effects of legal regime, law enforcement, and culture, we require both the acquiring and target firms to be incorporated and headquartered in the U.S. to be included in our sample.”

Our news journalists obtained a quote from the research from Louisiana State University, “We also use the Heckman (1976) procedure to control for self-selection bias. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, discretionary revenues, real activities earnings management, and accrual estimation errors. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that U.S. domestic RM firms have lower earnings quality compared with U.S. IPO firms.”

According to the news editors, the research concluded: “Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process.”

Journal of Accounting and Public Policy

Volume 33, Issue 6, November–December 2014, Pages 573–595

Does pedigree matter? Earnings quality of U.S. listed domestic firms via reverse mergers

Yu Chena, , Jared S. Soileaub1

Abstract

This paper examines earnings quality of U.S. domestic firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 to 2011. In order to mitigate confounding effects of legal regime, law enforcement, and culture, we require both the acquiring and target firms to be incorporated and headquartered in the U.S. to be included in our sample. We also use the Heckman (1976) procedure to control for self-selection bias. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, discretionary revenues, real activities earnings management, and accrual estimation errors. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that U.S. domestic RM firms have lower earnings quality compared with U.S. IPO firms. Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process. 

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