Why do Chinese firms voluntarily delist from U.S. stock exchanges?

Abstract

This study investigated the potential reasons Chinese firms voluntarily delist from U.S. stock exchanges. Leuz, Triantis, and Wang (2008) argued that firms trade off between benefits and costs of public listing, and firms that have difficulties raising funds from stock markets are more likely to cease public reporting to avoid the high costs. In studying all Chinese firms voluntarily delisted from the New York Stock Exchange and Nasdaq from 2009 to 2017, the T-test empirical results showed that these delisted Chinese firms had significantly worse performance, measured by return on equity (ROE), and lower debt ratios than other active firms. In addition, the multivariate regression results showed the probability of delisting is significantly and negatively associated with firms’ ROE and debt ratio. The finding regarding ROE is consistent with the theory proposed by Leuz et al.(2008). Firms with worse performance are less likely to be appreciated by investors, and therefore, they may choose to delist to avoid the costs of public reporting. The finding regarding debt ratio is not consistent with Leuz et al.(2008), which could be caused by the uniqueness of the Chinese economic environment. The U.S. stock markets were negatively influenced by the 2008 financial crisis, whereas Chinese markets were not. Chinese markets could potentially provide more funds to firms at lower costs than U.S. markets could. Moreover, Chinese financial markets have developed gradually, encouraging Chinese firms to go back to their local financial markets to avoid the underpricing induced by the equity home bias. Chinese firms with lower debt ratios are believed to be relatively safe investments with opportunities to go public on Chinese stock exchanges, which may encourage voluntary delisting from U.S. markets. Firms’ delisting could cause investors to lose capital significantly; these findings will interest shareholders by providing leading indicators of delisting.