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RESEARCH PRODUCT

Why Do U.S.-Listed Chinese Firms Go Private?

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The period 2010-2012 saw a dramatic increase in the number of Chinese firms listed in the United States announcing deals to delist and go private. We argue that accounting scandals and legal uncertainties involving Chinese firms in recent years may have caused outside investors to struggle to distinguish between legitimate and fraudulent firms. As a result some legitimate Chinese companies may have become undervalued, which arguably has given them a heightened incentive to go private. We examine all the companies that announced going-private deals during this period and find evidence that firms that go private tend to do so after a prolonged period of negative excess stock returns relative to relevant reference indices, and that they tend to have comparatively low market-to-book-value ratios. These findings are consistent with the undervaluation thesis. Moreover, the data shows that a portion of proposed going-private deals are never effectuated and that the market has trouble predicting which deals will successfully close and which will not. Contrary to expectation, deals involving relatively high market-to-book value firms are the most likely to be concluded. The findings underscore the critical role of audit quality and effective regulation in avoiding adverse selection problems in financial markets.