Accounting Seminar（2014-09）

Topic：The Market for “Lemons”: A Study of Quality Uncertainty and the Market Mechanism for Chinese Firms Listed in the US

Speaker: Hai Lu,Rotman School of Management University of Toronto

Time:: Friday,23 May, 10:00-11:30am

Location:Room 217, Guanghua Building 2

Organizer:Department of Accounting,MPAcc GSM, PKU

Abstract：

Akerlof’s (1970) seminal work provides a framework for a market failure and discusses the consequences of quality uncertainty. We hypothesize and find that a classic “Lemons” market occurred in recent Chinese IPO firms listed in the US. Our study provides empirical evidence of a severe market failure that has rarely been documented in the literature - Chinese firm US IPOs became almost extinct by 2012. Our tests reveal that there is little difference inex anteobservable characteristics of “good” (non-fraudulent ) versus “bad” (fraudulent) firms when the Chinese IPO firms went public while entrepreneurs know their type as suggested by theirex postprivatizations. Our evidence indicates the existence of severe information asymmetry and substantial cost of dishonesty. We find little evidence that traditional market mechanisms such as short selling behavior, auditor quality or underwriter reputation provide credible signals of firm quality. We further find that factors capturing potentialex postsettling up costs such as North America sales and CEO’s US education are less likely associated with financial frauds. Our findings support the efforts of Chinese and U.S. regulators in removing information search barrier and increasing enforcement cooperation.

Your participation is warmly welcomed!