Foreign primary listings and earnings quality

Abstract

Establishing the firm's primary listing on a foreign rather than domestic capital market is a phenomenon virtually unique to firms from the People's Republic of China (PRC). This study determines whether earnings quality varies between PRC-domiciled firms with a foreign primary listing and counterparts with a domestic primary listing. It further investigates possible explanatory factors (i.e. place-of-listing and share type) influencing variations in earnings quality. The analysis of 501 PRC-domiciled firms provides support for bonding theory indicating the earnings quality of PRC foreign primary listed firms is statistically significantly higher than domestic primary listed firms. Moreover, earnings quality difference exists across PRC firms with different places-of-listing and share types. Higher earnings quality amongst PRC-domiclied foreign primary listed firms is due to the higher regulatory requirements in Hong Kong and Singapore.Findings suggest risk-averse international investors may find purchasing shares in PRC-domiciled foreign primary listed firms (i.e., H-Share, Red-Chip, and S-Share) to be a more prudent investment option. Overall, perceptions of poor quality of PRC-domiciled firms listing abroad may affect investor interest and confidence therein damaging future PRC growth prospects. The PRC authorities may need to improve the regulatory rigour to protect the nation's investment reputational capital.