Survivability following reverse stock splits: What determines the fate of non-surviving firms?

Abstract

Using a sample of 1206 reverse split stocks during the 1995–2011 period, we find only 500 reverse splitting firms are able to survive on their own for five or more years. Of the 706 firms, that are unable to survive independently, about 20% are acquired by another organization while 80% get delisted for other reasons, usually due to an inability to meet listing requirements or bankruptcy. We investigate the determinants of the outcome for these 706 non-surviving firms and show that firms that are less subject to information asymmetry problems (i.e., larger firms, firms with better pre-split operating and stock price performance, and firms that went public more recently) are more likely to attract an acquisition offer that is acceptable to major shareholders. Also, we examine the post-reverse-split survival time for these firms and show that firms with poor operating and stock price performance, high leverage, and low post-split stock prices fail more quickly. Lower ex-date returns are associated with shorter survival times indicating the market tends to partially anticipate the relatively shorter life span of these firms. We also show that in the period prior to delisting, larger size, better operating performance, and higher sales growth are associated with a higher likelihood of a completed acquisition rather than a delisting due to bankruptcy or failure to meet listing requirements.JEL classification: G32; G34