The Value of Capital Market Regulation: IPOs versus Reverse Mergers
49 Pages Posted: 11 Mar 2009 Last revised: 1 Dec 2010
Date Written: 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.
Keywords: Disclosure, Securities Regulation, Initial Public Offerings, Reverse Mergers, Listing Standards
JEL Classification: G24, G32, G14, G15
Suggested Citation: Suggested Citation