Intangible investments and voluntary delisting: Mass exodus of Chinese firms from US stock exchanges

Abstract

Purpose: Drawing on a cost–benefit perspective, this paper aims to explore the relation between information asymmetry and the decision to delist from stock exchanges during periods of uncertainty. Specifically, it investigates the role of firms’ intangible investments and the availability of alternative sources of finance on the decision to delist from foreign stock markets. Design/methodology/approach: The study takes advantage of a natural experiment in which cross-listed Chinese firms facing uncertainty in US markets because of widespread allegations of accounting fraud decide on whether to remain listed or voluntarily delist. The decision to delist is modelled as a function of the level of information asymmetry between firms and their stakeholders and the availability of alternative financing, while controlling for other drivers of firms’ delisting decision. The data used in the empirical analyses cover a hand-collected sample of 91 Chinese firms voluntarily delisting from US stock markets between 2010 and 2016. This sample is matched with an equal sample of Chinese firms, which remained listed in US stock markets during the same period. A probit regression model accounting for fixed effects is used. Findings: There is a significant positive relationship between investments in intangible assets and firms’ decision to delist. Moreover, the positive intangibles−delisting nexus is accentuated by the availability of alternative sources of financing. Collectively, the results are consistent with the theoretical argument that the higher information asymmetry associated with intangible assets may increase the cost of staying listed on stock exchanges, particularly in periods of uncertainty (captured in this study by accounting fraud allegations targeting cross-listed firms). The results have important implications for corporate managers, capital market participants and policymakers. Practical implications: Policymakers and standard setters must continue to work to improve the accounting regulations of intangible assets and to promote the adoption of global accounting standard across both emerging and advanced economies. Originality/value: The study exploits a unique natural experimental setting to explore why cross-listed firms delist. The underlying theoretical framework to explain delisting is new. This framework captures the role of information asymmetry, uncertainty and alternative financing in explaining the cost and benefits of remaining listed on a foreign market.