“Earnings Management and Cross Listing: Evidence from a natural experiment in China” by David Ng
New York University
Our paper provides new evidence on earnings management of cross-listed firms by exploiting a natural experiment in China. Around 2000, regulators introduced stringent delisting requirements that firms with consecutive earnings losses for more than two years would be delisted from the mainland Chinese exchanges. No such delisting requirement was imposed in the Hong Kong exchange. We examine whether listed firms in Chinese market manage earnings to avoid delisting and whether mainland Chinese firms cross-listed in Hong Kong manage earnings the same way. Using a difference-in-difference methodology, we compare cross-listed and non-cross-listed firms' earnings management incentives before and after the policy change. We find that the new delisting threats induce rampant earnings management on mainland markets but cross listing in Hong Kong has a strong curbing effect on earnings management. The evidence suggests that bonding hypothesis of cross listing is at work in the Hong Kong exchange.