TY - JOUR
T1 - Effective legal bonding reduces adverse selection
T2 - Evidence from a positive shock to public monitoring and enforcement
AU - Huang, Disen
N1 - Funding Information:
This paper is based on my dissertation at the Leonard N. Stern School of Business at New York University. My research was made possible by the PhD fellowships I received from the Stern School of Business during the course of my studies and financial support from Rutgers Business School as a faculty member. I am deeply grateful for the guidance of my dissertation committee: April Klein (chair), Stephen Ryan, Yiwei Dou, and Kose John. I am thankful for help, encouragement, and comments from Mary Brooke Billings, Matthew Cedergren, Justin Deng, Ilan Guttman, Svenja Dube, Kinda Hachem, Iftekhar Hasan, Igor Kadach, Jungbae Kim, Seil Kim, Oleg Kiryukhin, David (Changwook) Lee, Baruch Lev, Frank (Hong) Liu, Jianchuan Luo, Ronald Masulis, Xiaojing Meng, Joshua Ronen, Bharat Sarath, Roger Silvers, Michael Tang, Mingming Zhou, Chenqi Zhu, and workshop participants at two NYU Stern Accounting Department brown bags. Special thanks to discussants Jongsub Lee and Rima Turk Ariss for valuable comments on separate occasions. Thanks to participants at the 2017 Fordham Gabelli School of Business PhD Colloquium, the 2018 AAA Northeast Region Meeting, the Conference on China’s Financial Markets and Growth Rebalancing, a University of British Columbia Sauder Business School research seminar, an IESE Business school research seminar, and a Rutgers Business School research seminar. Many thanks to the editor and two anonymous reviewers for extensive constructive comments. Last but not least, thanks to Anya Takos-Francioli and other staff at the Stern PhD office for exceptional administrative support.
Funding Information:
☆ This paper is based on my dissertation at the Leonard N. Stern School of Business at New York University. My research was made possible by the PhD fellowships I received from the Stern School of Business during the course of my studies and financial support from Rutgers Business School as a faculty member. I am deeply grateful for the guidance of my dissertation committee: April Klein (chair), Stephen Ryan, Yiwei Dou, and Kose John. I am thankful for help, encouragement, and comments from Mary Brooke Billings, Matthew Cedergren, Justin Deng, Ilan Guttman, Svenja Dube, Kinda Hachem, Iftekhar Hasan, Igor Kadach, Jungbae Kim, Seil Kim, Oleg Kiryukhin, David (Changwook) Lee, Baruch Lev, Frank (Hong) Liu, Jianchuan Luo, Ronald Masulis, Xiaojing Meng, Joshua Ronen, Bharat Sarath, Roger Silvers, Michael Tang, Mingming Zhou, Chenqi Zhu, and workshop participants at two NYU Stern Accounting Department brown bags. Special thanks to discussants Jongsub Lee and Rima Turk Ariss for valuable comments on separate occasions. Thanks to participants at the 2017 Fordham Gabelli School of Business PhD Colloquium, the 2018 AAA Northeast Region Meeting, the Conference on China's Financial Markets and Growth Rebalancing, a University of British Columbia Sauder Business School research seminar, an IESE Business school research seminar, and a Rutgers Business School research seminar. Many thanks to the editor and two anonymous reviewers for extensive constructive comments. Last but not least, thanks to Anya Takos-Francioli and other staff at the Stern PhD office for exceptional administrative support.
Publisher Copyright:
© 2022 Elsevier Inc.
PY - 2023/1/1
Y1 - 2023/1/1
N2 - Akerlof (1970) predicts that in a market with information asymmetry, third-party certification increases credibility, which in turn increases liquidity, valuation, and dispersion of valuation. Of these predictions, changes in valuation dispersion have been overlooked empirically in the securities setting. This paper uses the 2013 Sino-U.S. agreement on enforcement cooperation as an increase in credibility for U.S.-listed Chinese firms. I hypothesize and find that after the agreement, high- and low-quality U.S.-listed Chinese firms’ valuations disperse. U.S.-listed Chinese firms’ liquidity rises as well. The effects are more pronounced for firms with more rigorous listing processes, positive pre-event reputations, and transparent information environments. The evidence suggests that the expectation of cooperation, which enables legal bonding, alleviates investors’ adverse selection concerns. The combined results shed light on complementarity between legal and reputational bonding.
AB - Akerlof (1970) predicts that in a market with information asymmetry, third-party certification increases credibility, which in turn increases liquidity, valuation, and dispersion of valuation. Of these predictions, changes in valuation dispersion have been overlooked empirically in the securities setting. This paper uses the 2013 Sino-U.S. agreement on enforcement cooperation as an increase in credibility for U.S.-listed Chinese firms. I hypothesize and find that after the agreement, high- and low-quality U.S.-listed Chinese firms’ valuations disperse. U.S.-listed Chinese firms’ liquidity rises as well. The effects are more pronounced for firms with more rigorous listing processes, positive pre-event reputations, and transparent information environments. The evidence suggests that the expectation of cooperation, which enables legal bonding, alleviates investors’ adverse selection concerns. The combined results shed light on complementarity between legal and reputational bonding.
KW - Adverse selection
KW - Bonding hypothesis
KW - Cross-border enforcement
KW - Cross-listing
KW - Legal bonding
KW - Reputational bonding
UR - http://www.scopus.com/inward/record.url?scp=85140978523&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85140978523&partnerID=8YFLogxK
U2 - 10.1016/j.jaccpubpol.2022.107030
DO - 10.1016/j.jaccpubpol.2022.107030
M3 - Article
AN - SCOPUS:85140978523
SN - 0278-4254
VL - 42
JO - Journal of Accounting and Public Policy
JF - Journal of Accounting and Public Policy
IS - 1
M1 - 107030
ER -