Reverse Mergers Research Articles

Psychic Distance’s Impact on China’s Reverse M&A Innovation

ABSTRACT In this study, we examined Chinese firms’ cross-border reverse mergers and acquisitions (M&As). From the perspective of internal and external uncertainties, as well as the essence of psychic distance (PD), we established five dimensions of the PD of cross-border reverse M&A: cultural distance, national image, degree of internationalization, top management team (TMT)‘s overseas background, and perceived distance. Using fuzzy-set qualitative comparative analysis (fsQCA), we found that the impact of PD on innovation performance was a combination of multiple factors, showing three types of configurations: external uncertainty dominant, internal uncertainty dominant, and perceived distance dominant. We further explored the interactions between knowledge conditions, such as firm size, industry relevance, and relative knowledge scale, and PD. This study supplements and expands current theories on the internationalization of emerging market enterprises from the perspective of latecomer countries.

Case Study of Reverse Merger - A Case Study on the Performance of SF Holding's Acquisition of Dingtai New Materials

SF Express continues to lead the Courier industry in China with its standardization, high quality and high effectiveness advantages. However, as customers' requirements for service quality continue to increase, the cost of express delivery industry continues to increase, and in the case of numerous express delivery industries and fierce competition, SF Holding's traditional business model and existing capital are difficult to stabilize its leading position in the express delivery industry. In order to ensure the expansion of its own capital and seize a favorable position in the market, SF Holding chose to go public in 2016 through the backdoor of Dingtai New Materials. This paper will explain in detail the principle, practical operation, strategy and practice behind the success of SF Express backdoor listing, and study the financial performance of SF Holding by analyzing four indicators of debt repayment, operation, development and profitability according to the financial index method, sum up the strategic experience of the enterprise, and provide effective reference for the development and transformation of similar enterprises.

Financial Performance Analysis of State-Owned Enterprises' Reverse Mergers Based on Guangdong Hydroelectric Power Corporation's Case

In order to improve the competitiveness of state-owned firms, it is crucial to utilize their existing assets effectively and promote efficiency. The state promotes the restructuring and development of pertinent state-owned firms through mergers and acquisitions. This paper assesses the debt-paying ability, profitability, and expansion capabilities of Guangdong Construction Group through financial performance analysis, using the reverse takeover by Guangdong Hydropower as a case study. Dealing with the financial risks and managerial issues in the reorganization of state-owned companies to improve progress and performance. This paper suggests enhancing capital flow, advancing integration strategies post-mergers and acquisitions, clarifying the objectives of mergers and acquisitions, accelerating the optimization of management systems post-mergers and acquisitions, and developing scientifically grounded merger and acquisition plans based on real circumstances. This paper offers advice for state-owned enterprises involved in similar reverse acquisitions or mergers and acquisitions.

Strategic choices in going public: ESG performance implications in China

AbstractChoices in going public are important business strategies that can influence Environmental, Social and Governance (ESG) performance through varying levels of regulatory scrutiny, investor expectations, governance improvements, public attention and strategic focus. We investigate the impact of listing approach on ESG performance in China over the period of 2009 to 2022, by comparing the ESG performance of firms going public via initial public offering (IPO) versus reverse merger (RM). Consistent with our institutional, legitimacy and averse‐selection hypotheses, we find that RM firms exhibit significantly lower ESG performance compared with IPO firms, a difference we attribute to the greater performance pressure, higher litigation risk, greater financing constraints and poorer internal controls experienced by RM firms. These factors likely reduce management's willingness to invest in and improve ESG outcomes. However, as time passed, the discrepancy in ESG performance between RM firms and IPO firms gradually diminished. Additionally, the nature of state ownership and reduced competitive pressure in the industry also serve to mitigate the negative impact of RMs on firms' ESG performance. To promote sustainable development, going public via IPO offers a better business strategy, creating shared value among a broader range of stakeholders, including socially responsible investors, advocacy groups and regulators.

Auditor choice in reverse mergers: Evidence from China

Using data from 123 reverse mergers (RMs) in China, this study investigates the determinants and economic consequences of auditor choice in RMs. We find that the choice of a new auditor instead of the incumbent auditor is not related to auditor competence but to the relative bargaining power of RM firms and publicly listed firms (shell firms), and that the probability of choosing new auditors is higher when RM firms have more bargaining power relative to shell firms. We also find that hiring new auditors in the RM is associated with a higher valuation of injected assets and higher pre-listing income-increasing discretionary accruals in RM firms. Furthermore, post-merger firms exhibit drops in accounting performance and firm value and are more likely to restate their financial reports within 3 years of listing when new auditors are appointed in RMs. Finally, the cross-sectional test shows that this effect mainly exists in the context of RMs where the newly appointed auditor is a non-Big 10 auditor and a non-specialist auditor. Overall, our results emphasize the role of RM firms and shell firms in auditor choice for RMs and highlight the implications of such a joint decision on investor protection.

Performance commitments and the properties of analyst earnings forecasts: Evidence from Chinese reverse merger firms

We investigate whether the performance commitments in Chinese reverse merger (RM) transactions affect the properties of analyst earnings forecasts. All RM firms in China are required to make performance commitments for a limited number of years after being publicly listed. As performance commitment is an important piece of public information, it can influence analysts' understanding of firms and their efforts to forecast earnings. Using manually assembled information on RM transactions, we find that, in comparison to the control firms, RM firms exhibit an increase in analyst forecast error and dispersion after the end of performance commitment. This effect is more pronounced in firms with lower levels of information transparency. We also document that the public information contents of analyst forecasts decrease and forecast revisions increase in the post-commitment period, while the private information content of analyst forecasts and the number of their firm visits remain unchanged. Overall, our findings suggest that analysts rely greatly on public information; they have important implications for academics and policymakers in understanding how performance commitments in RM transactions affect the market information environment.

Frequency Change: Korro Bio Edits Its Message, Rewrites Its Future with Reverse Merger

Frequency Change: Korro Bio Edits Its Message, Rewrites Its Future with Reverse Merger

중국 주식시장에서의 역합병 규제에 관한 연구

최근 몇 년 동안 중국의 시장 경제 개혁이 계속 심화되는 가운데 민간 자본 시장이 빠르게 발전하고 있다. 중국경제가 성장하면서 기업의 자금 조달수단에 대한 다양한 요구는 점점 더 증대되고 있으며 상장을 통하여 대중에게 직접 자금을 조달하는 방법은 기업들이 가장 선호하는 자금조달수단이 되어 가고 있다. 하지만 중국에서 상장 허용기준, 심사 및 승인절차 역시 점차 까다로워지고 있는 상황이다. 상장을 원하는 기업의 수가 계속 증가하면서 상장을 통해 자금조달을 완료하는 데 필요한 시간과 비용이 점점 더 증대되고 있다. 결과적으로 소수의 기업만이 상장을 통한 자금조달이 가능한 상황이 지속되면서 상장의 대안으로 역합병이 대중화되기 시작했다. 역합병은 상장을 통한 자금조달을 희망하지만 심사기준 및 절차를 통과하기 어려운 기업들에게 자금조달의 길을 열어주고 있다. 하지만 현행 중국내의 역합병과 관련하여서는 몇 가지 규제적 위험이 발견된다. 이러한 문제는 주로 상장사의 정보공개미비, 상장사 상장폐지제도와 관련된 문제, 역합병 판단기준의 불분명이라는 세 가지 측면에서 살펴볼 수 있다. 본 연구에서는 사례 연구를 통해 중국 증권 시장의 역합병 현황을 소개하고 현황을 통해 발견되는 문제를 통해 관련 개선안을 제시하였다.

Reverse mergers and stock price crash risk: evidence from China

PurposeDoes the choice of listing process matter in determining a firm's future crash risk? It is understood that the main function of an equity market is to provide price discovery, however, it is not clear whether the choice of listing methods would matter to the shareholders' wealth in the long term. We are the first to answer this question by utilising a hand-collected dataset that identifies all companies that went public via reverse merger (RM) in a growing emerging market.Design/methodology/approachUsing hand-collected data from 2000 to 2018 in China, we follow the literature to construct two crash risk measures for RM and IPO firms. Our main analysis is performed using OLS regressions on the full sample as well as a sample using Propensity Score Matching. Our results hold with a number of robustness checks.FindingsWe find that reverse merger (RM) firms exhibit higher future stock price crash risk than initial public offering (IPO) firms. This relationship is more predominant in non-state-owned enterprises, and we find weak evidence suggesting such relationship weakens as firms stay longer in the market. There is no significant difference in future stock price crash risk between RM firms listed during IPO suspension periods and normal IPO firms.Originality/valueWe are the first to study the choice of listing method and its impact on firms' future stock price crash risk.

Evaluating asset pricing models: A revised factor model for China

We develop a revised factor model, accounting for unique features of Chinese markets, and evaluate the performance of competing asset pricing models. Extant literature reveals that eliminating the smallest 30% of stocks improves the performance of factor models. The revised factor model excludes firms with a high expected probability of becoming shells, which are companies valued as shells in reverse mergers serving as an alternative way to go public. Our revised model has the smallest model specification errors and the best explanatory power among various constructed portfolios. This new finding suggests that our model offers an effective benchmark model for empirical asset pricing in the Chinese stock market.

Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets

From 2007 to 2020, unlisted Chinese firms paid an average of over US $500 million to listed firms for their shell value in reverse merger transactions. We show that this large shadow price for a public listing sheds light on other features of Chinese markets, including (i) near-zero mortality rates, (ii) frequent major-asset restructurings (MARs), (iii) insensitivity of small-firm prices to corporate earnings, and (iv) a large size effect. A firm-level measure of expected shell probability (ESP) predicts stock returns, MARs, earnings-to-price sensitivity, and short-window returns to initial public offering-related regulatory news. Furthermore, adding ESP to existing pricing models for Chinese stocks significantly improves model performance.

Goodbye to Shell Games: Revisiting Factor Models in China

We show that the estimated shell value of reverse mergers dramatically drops in the out-of-sample periods of Liu et al. (2019, Journal of Financial Economics), which is related to Chinese IPO policy change and system reforms. This structural break is due to the fact that fewer firms choose to go public through a reverse merger. Thus, we document that the shell contamination is considerably mitigated and reconstruct factor models by flexibly eliminating the smallest 30% of stocks. Compared with other popular factor models in the finance literature, our revised CH3/4 model not only has the smallest model specification errors but also helps effectively explain the 25 Fama–French portfolios and most of reported stock anomalies in China.

IPO relative difficulty, M&A option and size effect

Size effect in the Chinese stock market is huge from 2012 to 2017. We empirically identify a driving force behind the effect: M&A option caused by IPO and M&A policies changes. We show that the M&A frequency increases and the acquirers' market value deceases as the IPO relative difficulty rises, small firm premium is positively related to both IPO relative difficulty and M&A frequency, and among the listed firms that have stronger tendency to merge or acquire a private firm, size effect is significantly larger. These results hold when controlling reverse merger probability. In sum, we reveal a new mechanism: Compared with a large public firm, a small one is more likely to acquire a private firm with discount since both the acquired and the acquirer benefit more, so the stock price of a small firm contains a larger part of M&A option. This option value increases as IPO relative difficulty rises.

Special-Purpose Acquisition Companies: Same Spacs but Different Types: The Good, the Bad, the Ugly and the Others

In the last two years the number and volume of Special Purpose Acquisition Companies (SPACs) have reached an unprecedented high: 70% of total number of US IPOs were SPACs IPOs in 2021 -mid June- raising over $142 billion from investors (72,34% of total volume of US IPOs). This recent SPAC “hype” demands a closer academic research of the SPAC’s stocks performance, as we do in this study. Specifically, this is the first study analyzing SPACs short-term stock performance for SPACs gone public after 2010 (when their structure fundamentally changed) around two important events in their life using the cumulative abnormal returns (CARs) methodology: 1) the announcement of the agreement with the target firm and 2) the completion of the reversed merger; as well as identifying and proposing a taxonomy of 4 types of SPACs, according to 3 main factors for success. The sample consists of US-listed SPACs from 2016-2021. Once we have applied our taxonomy, we do the same analysis of the short-term stock performance for both events for the different clusters which gives us more insight into which SPACs are more heavily affected by the different events. Our contribution is threefold: First, this paper contributes to the SPAC-IPO research, expanding the investigation period to 2021. Second, we propose a taxonomy of the SPACs clustering them into four groups based on three specific characteristics: the number of days it takes the SPAC to announce the merger, the volatility of the price since the SPAC’s initial listing price until the reverse merger is completed (pump and dump effect) and the difference between today’s price and the listing price. Thirdly, an event study for both key events show us that the first event (target announcement) has a positive effect, mainly driven by the group A cluster (The Good). For the second event (completion of merger) there is a negative effect, mostly driven by the type C cluster (The Ugly).

How Inductive and Deductive Generalization Shape the Guilt-by-Association Phenomenon Among Firms: Theory and Evidence

This study advances and tests the notion that the phenomenon of guilt by association-- whereby innocent organizations are penalized due to their similarity to offending organizations-- is shaped by two distinct forms of generalization. We analyze how and why evaluators’ interpretative process following instances of corporate misconduct will likely include not only inductive generalization (rooted in similarity judgments and prototype-based categorization) but also deductive generalizing (rooted in evaluators’ theories and causal-based categorization). We highlight the role and relevance of this neglected distinction by extending guilt-by-association predictions to include two unique predictions based on deductive generalization. First, we posit a recipient effect: if an innocent organization falls under a negative stereotype that causally links the innocent firm with corporate misconduct, then that innocent firm will suffer a greater negative spillover effect, irrespective of its similarity to the offending firm. Second, we also posit a transmission effect: if the offending firm falls under the same negative stereotype, then the negative spillover effect to other similar firms will be lessened. We also analyze how media discourse can foster negative stereotypes, and thus amplify these two effects. We find support for our hypotheses in an analysis of stock market reactions to corporate misconduct for all U.S. and international firms using reverse mergers to gain publicly traded status in the United States. We discuss the implications of our theoretical perspective and empirical findings for research on corporate misconduct, guilt by association, and stock market prejudice.

Impact of the liability of foreignness, domicile of incorporation and an institutional change on reverse merger firms’ capital-raising performance

PurposeThe purpose of this study is to examine how the liability of foreignness (LOF), choice of incorporation and an institutional change independently and jointly affect a reverse merger (RM) firm’s capital-raising performance.Design/methodology/approachThe study draws on the data of shell reverse merger transactions in the USA from 2007 to 2016.FindingsThis paper finds that LOF and the choice of incorporation as a signal have a significant effect on RM firms’ capital-raising performance. In addition, this study finds that the effectiveness of the signaling can be affected by LOF. Finally, this paper finds that an institutional change that lowers the entry barrier to the initial public offering (which is a superior alternate to an RM) affects the impacts of LOF and signaling on RM firms’ capital-raising performance.Originality/valueThe study contributes to the international business literature by examining the RM (which has been an under-researched topic in the literature) by drawing on the LOF framework. The study finds that LOF and the choice of state for incorporation affect RM firms’ capital-raising performance; moreover, these relationships are affected by an institutional change.

Special Purpose Acquisition Companies (SPACs) and the SEC

Special Purpose Acquisition Companies (SPACs) are simply enterprises that raise money from the public with the intention of purchasing an existing business and become publicly-traded in the securities markets. If the SPAC is successful in raising money and the acquisition takes place, the target company takes the SPAC’s place on a stock exchange, in a transaction that resembles a public offering. Also known as “blank-check” or “reverse merger” companies, this process avoids many of the pitfalls of a traditional initial public offering. During late 2020 and the first six months of 2021 an unprecedented surge in the popularity and issuance of Special Purpose Acquisition Companies (SPACSs) takes place. John Coates, the SEC’s Acting Director of the Division of Corporation Finance, observes, “Concerns include risks from fees, conflicts, and sponsor compensation, from celebrity sponsorship and the potential for retail participation drawn by baseless hype, and the sheer amount of capital pouring into the SPACS, each of which is designed to hunt for a private target to take public.” We discuss this popular approach to capital formation within the context of the securities issuance process and examine the robust market for SPAC issuance during 2020 and early 2021. Financial reporting and auditing considerations are examined, along with regulatory concerns. Several examples of these offerings are provided. We believe this paper adds to the discussion and understanding of this widely employed financing mechanism.

The Marketing of Initial Public Offerings

Using a novel measure of marketing during initial public offering (IPO) roadshows, we find that marketing positively predicts underpricing, price revisions, and post-IPO liquidity, but has little effect on fees. We further show that IPO roadshow duration and marketing intensity have decreased dramatically over the last fifteen years, leading up to and continuing through the COVID-19 period. Additional tests suggest these trends are related to technological development and the rise in passive ownership. Our findings are relevant to issuers’ choice between traditional bookbuilt IPOs and other capital raising alternatives (e.g., reverse mergers with special purpose acquisition companies (SPACs)).

How reverse merger firms raise capital in PIPEs: search costs and placement agent reputation

We examine the role of placement agents in private investments in public equity (PIPE) deals of firms that went public via a reverse merger (RM). We find that reputable placement agents with greater expertise (expert agents) help RM firms to complete their PIPE deals in a smaller number of financing rounds (closings) and raise funds from a larger base of private investors. In exchange for these benefits, RM firms advised by expert agents agree to more investor-friendly contract terms and pay higher cash compensation to their placement agents. Overall, our evidence indicates that, while expert PIPE agents use their superior networking capabilities to reduce the search costs of RM firms, they also exercise more bargaining power against RM firms compared to non-expert PIPE agents. Finally, compared to the PIPE offerings of IPO firms, the PIPE offerings of RM firms are more likely to involve deals with multiple closings and larger offer price discounts. This suggests that raising new capital in PIPEs entails significantly higher costs for RM firms than IPO firms.

Spillover Effects of Fraud Allegations and Investor Sentiment

ABSTRACTWe examine whether a stock price spillover effect spreads through the method of listing or country of origin and whether this spillover effect changes when investor sentiment shifts. Using a sample of fraud allegations against Chinese companies that became public through Chinese reverse mergers (CRMs), we investigate whether firms that experienced negative spillover effects on their stock prices are those from the same country and/or with the same method of listing as the firms accused of fraud. We first show that the negative spillover effect channeled through the firm's country of origin becomes stronger when investor sentiment about Chinese companies becomes pessimistic, as evinced by significant declines in the stock prices of non‐fraudulent Chinese companies, including both CRMs and Chinese IPOs. Second, we show that the negative spillover effects on CRMs are stronger than those on Chinese IPOs and non‐Chinese reverse mergers, suggesting that both country and listing method are applicable to CRMs. Our findings indicate that (i) investor sentiment plays an important role in the spillover process involving fraud allegations and (ii) while the two channels could coexist, negative spillover effects that spread through the country of origin play a more prominent role than those that spread through the method of listing.