Alternatives for Going Public: Evidence from Reverse Takeovers, Self-Underwritten IPOs, and Traditional IPOs

Abstract

We examine the characteristics of firms using reverse takeovers and self-underwritten IPOs as an alternative to the traditional underwritten IPO. We find that at the time they go public, firms that use alternative mechanisms tend to be less profitable than contemporaneously issued IPO firms of comparable size in the same 3 digit SIC code, but they do not exhibit significantly higher distress. However, by two years post going public, they have significantly increased debt and experience declines in profitability and balance sheet liquidity. Furthermore, we find that RT and SU firms are characterized by lower levels of trading liquidity and significantly higher volatility, as measured by the standard deviation of returns. While the combined sample of RT and SU firms have comparable institutional ownership post going public to their control IPO firms, RT firms are characterized by significant lower institutional ownership than their matches, and while IPO firms experience significant increases in institutional support, those using RTs and SUs experience declines. We also find evidence that firms utilizing alternative going public mechanisms outperform their matched traditional IPO counterparts in the short term, and exhibit comparable performance in the three years following going public as indicated by equal-weighted buy and hold returns.