Reverse mergers and stock price crash risk: evidence from China

Zijian Cheng, Zhangxin (Frank) Liu and Jiaxin Xie

Journal of Accounting Literature, 2022, vol. 44, issue 2/3, 192-227

Abstract: Purpose - Does 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/approach - Using 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. Findings - We 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/value - We are the first to study the choice of listing method and its impact on firms' future stock price crash risk.

Keywords: Reverse mergers; Backdoor listing; Crash risk; G32; G35 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jalpps:jal-08-2022-0085

DOI: 10.1108/JAL-08-2022-0085

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