Chinese Companies Listed Abroad

• Author: Mark Humphery-Jenner
• Pages: 256-273

HUMPHERY-JENNER (DO NOT DELETE) 2012/8/29 3:34 PM

256 TSINGHUA CHINA LAW REVIEW [Vol. 4:255

CHINESE COMPANIES LISTED ABROAD

Mark Humphery-Jenner

Abstract

Chinese companies listed in the US have come to the attention of securities regulators and have

been subject to a large number of securities class actions in recent years. However, China does

have relatively stringent governance requirements and maintains a merits review of

applications to list in the US, both of which would suggest that the average cross-listed company

should perform adequately. Prior evidence from before 2009 suggests that this is the case. This

paper extends such evidence to more recent years. The results suggest that Chinese companies

listed in the US perform at least as well as their peers and do not have demonstrably worse

corporate governance. The results indicate that mainly high quality companies list in the US,

potentially reflecting China’s merit’s review of applications to list overseas.

I. INTRODUCTION

An increasingly large number of Chinese companies are listing in

non-mainland exchanges. Such companies seek to gain access to

overseas capital, potentially increase their product-market reach, and

signal their quality by bonding to overseas markets’ stringent

regulatory requirements. In order to list overseas, firms must obtain

the approval of the Chinese Securities Regulatory Commission

(CSRC), which conducts a merits review of the firm’s wish to list

abroad. However, despite this merits review, a non-trivial number of

firms have come under regulatory scrutiny in the US, or have been

liable to securities class actions. 1

China has imposed significant barriers to companies listing abroad.

A Chinese company can issue securities only if the CSRC approves it.

2 The CSRC has a wide discretion over whether a company can issue

shares abroad. This discretion has advantages and disadvantages. A

potential disadvantage is that the CSRC could excessively restrict

companies from gaining access to capital. However, the CSRC could

also use its discretion to ensure that only well-governed companies list

in the US, thereby strengthening China’s corporate reputation. This

merits review process also exists within a climate of relatively strong

corporate governance.

China has also moved to strengthen corporate governance. In 2002,

China adopted a “Code of Corporate Governance for Listed

1 Elaine Buckberg & Max Gulker, Cross-Border Shareholder Class Actions Before and After

Morrison (NERA Economic Consulting, 2011), fig 1.

2 See Article 2 of the Special Provisions of the State Council on Issuing and Listing of Shares Abroad

by Companies Limited by Shares. Available here:

http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/AdministrativeLaws/200907/t20090729_119394.htm,

and from: http://www.asianlii.org/cn/legis/cen/laws/spotscctfalaosblsc1081/

HUMPHERY-JENNER (DO NOT DELETE) 2012/8/29 3:34 PM

2012] CHINESE COMPANIES LISTED ABROAD 257

Companies in China”, 3 which mandates independent directors, and

directorial elections. They are reportedly comparable with other

national standards.4 In 2006, China adopted the ‘Basic Accounting

Standards for Business Enterprises’, which are broadly in line with

IFRS. China has also adopted a set of 48 auditing standards, to closer

align Chinese auditing practice with that mandated under the

International Standards of Auditing. 5 Overall, these significant

governance reforms should reduce the likelihood of corporate

malfeasance amongst Chinese companies. This should be especially

so for companies that list in the US, where the CSRC could use its

discretion to prevent poorly governed companies form listing in the

US.

There is some prior evidence on the governance of Chinese

companies from prior to 2009.6 However, much of the scrutiny aimed

at Chinese companies has been in recent years, with the preponderance

of such securities class actions occurring in 2011. This suggests that it

is pertinent to analyze further the governance of Chinese companies

listed abroad.

Using a sample that spans both before and after the financial crisis

(from 1990-2011), I test whether this institutional background actually

limits listings in the US to companies who are strongly performing, as

measured by their operating performance, governance, and delisting

likelihood. I compare Chinese companies with other companies that

are listed in the US, and the sub-set of non-US companies that are

listed in the US. I use a sample spanning 1990 to 2011.

The results suggest that Chinese companies perform at least as well

as their non-Chinese peers. Their operating performance (i.e. ROA) is

at least as good as is that of other firms. They are no more likely to

delist than are other non-US firms. Their governance attributes (i.e.

board independence, number of directors) are not demonstrably

different than are those of other firms. The results tend to suggest that

it is mainly high quality Chinese companies that list in the US. These

3 CFA Institute, China Corporate Governance Survey (2007); CEIBS, “Towards Mature Corporate

Governance Standards in China”, Forbes India (2 December 2011), online:

standards-in-

china/30552/1>; Qiao Liu, “Corporate Governance in China: Current Practices, Economic Effects and

Institutional Determinants” (2006) 52:2 CESifo Economic Studies 415.

4 CFA Institute, supra note 3; CEIBS, supra note 3; Liu, supra note 3.

5 For a summary of these reforms see: CFA Institute, supra note 3; Donald C Clarke, “The

Independent Director in Chinese Corporate Governance” (2006) 31:1 Delaware Journal of Corporate Law

125.

6 For example, there is a pre-financial-crisis analysis in Mark L Humphery-Jenner, “The Governance

and Performance of Chinese Companies Listed Abroad: An Analysis of China’s Merits Review Approach

to Overseas Listings” (2012) 12:2 Journal of Corporate Law Studies 333.