Who cares about corporate fraud? Evidence from cross-border mergers and acquisitions of Chinese companies

• Published in: Review of quantitative finance and accounting 2023-02, Vol.60 (2), p.747-789
• Main Authors: Fu, Chao, Deng, Xiuyuan, Tang, Hongfei
• Format: Article
• Language: English
• Subjects: Accounting/Auditing; Acquisitions & mergers; Asymmetric information; Borders; Companies; Corporate Finance; Cross border transactions; Decision making; Econometrics; Economics and Finance; Finance; Fraud; Mergers; Operations Research/Decision Theory; Original Research; Transactions
• ISSN: 0924-865X; 1573-7179
• DOI: 10.1007/s11156-022-01111-6

Using a sample of Chinese public companies initiating cross-border mergers and acquisitions (M&As) from 2008 to 2015, we examine whether fraud revelations by regulators affect corporate cross-border M&As. We find that acquirers with a history of fraud are less likely to complete cross-border M&As, and if completed, take longer to conclude transactions than other acquirers. Our findings suggest that corporate fraud has implicit costs due to loss of reputation that may impede the progress of cross-border M&As. However, this history of fraud effect in an acquirer is not significant in Chinese domestic M&As, which reflects a difference in decision-making between the Chinese and foreign institutional environments. Our further tests indicate that the legal and market environment of the host country determines whether the negative effect exists, and the degree of information asymmetry between the parties also influences the negative effect. Companies with a history of fraud experience better performance change than other companies after M&As, which provides evidence of the external role of government regulation across countries.