Reverse merger audit fee premium: Evidence from China

We examine the impact of listing via a reverse merger (RM) on audit fees, which can serve as an indicator of a firm's perceived risk. Using a manually assembled dataset of Chinese companies from 2010 to 2019, we find that RMs tend to pay higher audit fees than their counterparts who undertake an initial public offering (IPO), primarily due to the increased risk of corporate litigation and financial misstatement. Furthermore, RMs with performance commitments are subject to even higher fees, and this audit fee premium is particularly evident during the performance commitment period. Our analysis shows that the audit fee premium for RMs is lower in state-owned enterprises, firms with robust internal control, and those operating under weaker oversight. These findings highlight the perceived risks associated with RMs in China and offer insights into why RMs frequently underperform following their listing in the Chinese market •RMs face higher audit fees due to increased litigation risks and financial misstatement.•RMs with performance commitments see higher audit fees during that period.•Audit fee premiums for RMs are lower in state-owned firms with strong controls.•These findings highlight the risks and common underperformance of RMs post-listing in China.•We discuss risk perception factors in RMs, emphasising corporate governance and regulation.