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Chinese Reverse-Merger Firms Outperform U.S. Peers, Study Says

Chinese companies entering the U.S. stock market in the past decade through reverse mergers have outperformed U.S. companies that used the same route to list, belying reports by short sellers including Muddy Waters LLC, a Stanford University professor said.

The track record of Muddy Waters founder Carson Block has been mixed, said Charles Lee, an accounting professor at Stanford’s Graduate School of Business. Sino-Forest Corp., a tree grower whose business model Muddy Waters had questioned, filed for bankruptcy in March, while Focus Media Holding Ltd. (FMCN) rebounded from a share slump after initial Muddy Waters criticism and subsequently exceeded those prices.

Lee said companies from China seeking reverse mergers were less leveraged and more profitable than their U.S. counterparts, citing a study he did that included 450 companies listed on U.S. exchanges and bulletin boards since 2001. He tracked the financial and stock performances of Chinese firms against their U.S. peers of similar size and in similar industries.

“If you bought the whole basket, you’d been better off buying the Chinese basket,” Lee said in an interview in Singapore on Jan. 22, adding his research adjusted for stock market and economic performances of both the U.S. and China during that period. “ The negative sentiment surrounding Chinese listings is overdone at this point.”

Trust Issue

Even taking into account the Chinese companies in the basket that have filed for bankruptcy, like Sino-Forest, or have been suspended by the exchange amid investigations, that group still outperformed the U.S. pool, said Lee, who was the global head of equity research at Barclays Global Investors.

The U.S. Securities and Exchange Commission has deregistered the securities of almost 50 companies and filed fraud cases against more than 40 issuers and executives as part of its investigation into the non-U.S. based firms. Many of them entered U.S. capital markets through reverse mergers, in which a closely held firm buys a shell company already public on an exchange, allowing them to list shares without the scrutiny of a public offering.

“We don’t trust their pet food, we don’t trust their toys, we even caught a few of them, so why should we trust their reverse mergers,” Lee said. “But the pool coming out of China is just a better group.”

To contact the reporter on this story: Klaus Wille in Singapore at kwille@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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