China and the Rise of Law-Proof Insiders

China and the Rise of Law-Proof Insiders

Jesse Fried, Ehud Kamar

Series number :

Serial Number: 

Date posted :

December 11 2020

Last revised :

December 11 2020
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  • China • 
  • Corporate governance • 
  • Securities Law • 
  • corporate law • 
  • enforcement • 
  • Cross-listing • 
  • Bonding

Alibaba, the e-commerce giant that completed a record-breaking IPO in the United States in 2014 and in mid-2020 was valued at over $500 billion, is one of hundreds of China-based U.S.-listed firms whose controlling insiders are largely "law-proof": the corporate and securities laws governing these firms are effectively unenforceable because the firms'

insiders, records, and assets are in China. Legal remedies thus cannot reliably prevent diversion of most of these firms' value.

Our analysis casts doubt on the claim that foreign firms list in the United States to bond insiders to tough securities regulation. In fact, for China-based firms not also listed in China, a U.S. listing has the opposite effect: it effectively insulates insiders from any securities law. Yet U.S. securities regulation not only allows these firms to list, but also requires less disclosure from them than from domestic firms. The system, we show, is biased against American entrepreneurs and likely harms American investors. We suggest ways to reduce this bias and better protect U.S. investors. More generally, our analysis makes clear that one cannot understand corporate governance arrangements without taking into account enforceability.