Description:
We study the effect of reverse mergers (RMs) on audit fees in China. Using a manually assembled data set from 2010-2019, we find that RMs pay higher audit fees than their IPO counterparts due to increased risks of corporate litigation and financial misstatement. RMs with performance commitments are charged even more, and the audit fee premium is more pronounced during the performance commitment period. Our analysis shows that the audit fee premium for RMs is lower in state-owned enterprises, firms with strong internal control, and when RMs are under weak oversight. These findings highlight the perceived risks of RMs in China and provide an explanation to why RMs often perform poorly post-listing in China