Monday, January 7, 2013
Just back from the annual AALS confab in (rainy) New Orleans. The theme of the conference this year was global engagement and the legal academy. In keeping with that theme, it's appropriate that I flag this paper by Siegel and Wang, Cross-Border Reverse Mergers: Causes and Consequences:
We study the set of non-U.S. companies that have used a reverse merger into the U.S. as a means to adopt U.S. corporate law (and sometimes also as the vehicle to adopt U.S. securities law). Most importantly, early adopters of cross-border reverse mergers and those firms which over time hired a Big Four auditor exhibited superior corporate governance outcomes. The later adopters of cross-border reverse mergers were more likely to strategically mimic the early entrants to gain access to the U.S. capital markets (that is, they took some governance actions but not others), and were shown over time to be more likely to have worse corporate governance outcomes. Whereas adopting Nevada’s corporate law in particular and having firm-level origins in China at first appear to be significant negative determinants of at least some corporate governance outcomes, adopting Nevada’s corporate law and having firm-level origins in China are two variables that lose their statistical power when examining the most comprehensive data set on cross-border reverse mergers yet assembled and when including a battery of relevant control variables. In summary, the evidence supports the existence of strategic mimicry which the capital market did not totally discern for many years, as well as the explanatory power of reputational bonding for reconciling the fact that adopting U.S. institutions can be used either to build reputation or to exploit relatively weak, formal U.S. cross-border law enforcement.
One lesson from this paper seems to be that if you are a Chinese company looking to access US capital market, don't adopt Nevada corporate law.