Shell Games: Are Chinese Reverse Merger Firms Inherently Toxic?

Charles Lee, Kevin K. Li and Ran Zhang
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Kevin K. Li: University of Toronto
Ran Zhang: Peking University

Research Papers from Stanford University, Graduate School of Business

Abstract: We examine the financial health and 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 companies that typically trade over-the-counter. Chinese RMs (CRMs), however, tend to be more mature and less speculative than either their U.S. counterparts or a group of exchange-industry-size matched firms. Collectively, CRMs outperformed their matched peers from inception through the end of 2011, even after including most of the firms accused of accounting fraud. CRMs that receive private-equity (PIPE) financing from sophisticated investors perform particularly well. Overall, despite the negative publicity (some from short sellers), we find little evidence that CRMs are inherently toxic investments. Our results shed light on the risk-performance trade-off for CRMs, as well as the delicate balance between credibility and access in well-functioning markets.

JEL-codes: G34 M41 N20 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cfn, nep-mfd and nep-tra
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3063

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