A survey of reverse mergers in the Chinese stock market

Purpose The purpose of this paper is to provide an introduction to the reverse mergers (RMs) conducted in the Chinese stock market by summarizing the regulatory system, surveying the literature on RMs and analyzing the major characteristics of 161 RM cases. Design/methodology/approach This paper introduces the characteristics and evolution of the regulatory framework governing RM activity in China. Then the paper reviews relevant academic studies on the RMs in China and other countries. Finally, the paper identifies and discusses the major characteristics of 161 RM cases in the Chinese stock market from 2006 to 2016. Findings Private companies that go public via RMs in China not only have superior asset quality but also demonstrate good accounting and stock price performance after listing, and these results are unlike those of studies on the quality of RMs in other countries. Research limitations/implications This paper is based on a survey of 161 RM cases in China’s stock market, with the major characteristics of the RMs being identified and analyzed. The limitations of previous studies and suggestions for further research are discussed. Originality/value This paper suggests that the relative superior performance of RMs in the Chinese stock market is caused by the interplay of market forces and regulatory oversight. The Chinese regulator’s pragmatic and flexible approach plays an important role in formulating regulatory policies that respond to the changing macroeconomic environment and financial markets.

Introduction

The worldwide landscape for raising firm capital from Initial Public Offerings (IPOs) has significantly evolved over the last few decades. This introductory chapter reviews more recent research on initial public offerings. The Oxford Handbook of IPOs comprises twenty-nine chapters from authors around the world. The chapters describe the economics of going public, short- and long-term performance of IPOs, regulation of IPOs, IPOs versus acquisitions, reverse mergers, special purpose acquisition companies, service providers including investment banks and auditors, venture capital funds, international differences in IPOs, and crowdfunding. The Introduction summarizes the chapters that appear in the Handbook and highlight research trends on topic.

Lower Visibility Platforms Serving as Stepping Stones to National Stock Exchanges

Using a proprietary, recent shell reverse mergers (SRMs) sample, we analyze the financial profiling, financing event specifics, disclosure levels, and governance schemes of the private companies that are quoted on lower visibility platforms. We examine SRMs forward in time and identify a unique sample of SRMs that is successful getting upgraded to main U.S. stock exchanges. We report their financial characteristics and how they differ from the SRMs that do not manage to get upgraded. Further, we delve into the pricing, source of financing, and contractual terms of PIPE transactions that constitute their main capital raising events. We also note any differences in the financing and governance characteristics surrounding SRM firm listing changes. Our study contributes to the empirical going public literature by identifying the determinants of successful companies within lower visibility platforms and by justifying the necessity of the private secondary market’s existence.