The Value of Capital Market Regulation: IPOs versus Reverse Mergers
Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Lille II - European Center for Corporate Control Studies
Douglas J. Cumming
York University - Schulich School of Business
Laval University; Center for Interuniversity Research and Analysis on Organization (CIRANO); European Center for Corporate Control Studies
November 25, 2010
We analyze the economic consequences of disclosure and regulation within a context of significant information asymmetry and lenient regulation. In Canada, firms can enter the stock market at a pre-revenue stage by fulfilling each of the requirements of an initial public offerings or using reverse mergers. This backdoor listing method implies a smoother oversight by the securities commission and a shorter process based on private placements. Controlling for several dimensions, including self-selection, we find that the choice of the listing method and regulation strictness significantly influence the value and long-run performance of newly listed firms. These results are consistent with theories suggesting that a commitment by a firm to a stricter regulatory oversight lowers the information asymmetry component of the cost of capital, reduces the heterogeneity of expectations and mispricing.
Number of Pages in PDF File: 49
Keywords: Disclosure, Securities Regulation, Initial Public Offerings, Reverse Mergers, Listing Standards
JEL Classification: G24, G32, G14, G15
Date posted: March 11, 2009 ; Last revised: December 1, 2010
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