Securities Class Actions in the United States and Canada Against Chinese Companies and Their Auditors: An Empirical Investigation

Abstract

Chinese companies have accessed the public capital markets of the US and Canada more frequently in recent years. This paper provides for the first time empirical evidence documenting the characteristics of private securities class action lawsuits (filed in the US and Canada) against Chinese companies and their auditors.Analysis of lawsuits worldwide shows that Chinese companies are positively associated with auditors being named defendants and experiencing a negative outcome (for example, related government enforcement actions and/or settlement payments to terminate class actions). A group of companies from countries outside the US and Canada was compared to the Chinese companies. For the comparison group, the factors that were associated with auditors being named defendants and experiencing a negative outcome are consistent with those that have been found in prior auditor litigation research. Conversely, the Chinese companies are characterized by a different pattern of litigation. Among the traditional factors, only fraud is associated with auditor litigation. In addition, the use of a small CPA firm auditor with the local audit engagement team office physically located in the US or Canada (as opposed to the local audit engagement team office being physically located in the People’s Republic of China (“PRC”)) is associated with auditor litigation. We find limited evidence that the use of a reverse merger to go public is positively associated with auditor litigation.We analyzed the Chinese lawsuits’ settlements. Aggregate settlement amounts are positively associated with the occurrence of an auditor settlement and with the class period length. Auditor settlement amounts are positively associated with the use of a large CPA firm auditor with the local audit engagement team office physically located in the US or Canada (as opposed to the local audit engagement team office being physically located in the PRC), class period length, and fraud. These findings suggest that the amount of litigation settlements of large CPA firms with the local audit engagement team office physically located in the PRC may have been reduced by their refusal to provide audit documentation requested by the Securities and Exchange Commission.