Shell Games: Are Chinese Reverse Merger Firms Inherently Toxic?

Abstract

We examine the initial financial health and subsequent performance of reverse mergers (RMs) that became active on U.S. stock markets between 2001 and 2010, particularly those from China (around 85% of all foreign RMs). As a group, RMs are small, early-stage, developmental companies that typically trade over-the-counter. Chinese RMs, however, are generally healthier and fare better than either their U.S. RM counterparts, or a group of industry-size-date matched firms from the same exchange. Despite negative publicity (some from short sellers), we find little evidence that the integrity of U.S. capital markets is harmed by Chinese firms entering via RMs.