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

Charles Lee, Yuanyu Qu and Tao Shen

Review of Finance, 2023, vol. 27, issue 3, 809-849

Abstract: 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.

Keywords: Reverse mergers; Shell values; IPOs; Return predictability; Chinese equity markets (search for similar items in EconPapers)
JEL-codes: G15 G18 G34 G38 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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