Shell Games: On the Value of Shell Companies

52 Pages Posted: 18 Aug 2009 Last revised: 20 Sep 2011

See all articles by Ioannis V. Floros

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance

Travis Sapp

Iowa State University - Department of Finance

Date Written: March 7, 2011


A reverse merger allows a private company to assume the current reporting status of another company that is public. This can be done quickly, without fundraising, road show, underwriter, substantial ownership dilution, or great expense. Private firms that go public via reverse merger are often motivated by the need to quickly secure financing through privately placed stock (PIPEs) and the desire to make acquisitions using stock as payment. In each of the last eight years reverse mergers have outnumbered traditional IPOs as a mechanism for going public, and reporting shell companies are providing fuel for much of this growth. We study 585 trading shell companies over the period 2006-2008. The purpose of most of these shell firms is to find a suitor for a reverse merger agreement. These companies have no systematic risk, operations, or assets, and their share price tends to decline over time. Yet, these firms have investors. When a takeover agreement is consummated, shell company three-month abnormal returns are 48.1%. We argue that this exceptional return is compensation to investors for shell stock illiquidity and the uncertainty of finding a reverse merger suitor. We show that shell company returns are much greater at the consummation of a merger than those of a similar entity that in dollar terms is more popular among investors — Special Purpose Acquisition Companies (SPACs).

Keywords: Shell Company, Reverse Merger, Reverse Takeover, Reverse Acquisition, Alternative Asset, SPACs, PIPEs

JEL Classification: G12, G24, G30

Suggested Citation

Floros, Ioannis V. and Sapp, Travis, Shell Games: On the Value of Shell Companies (March 7, 2011). Journal of Corporate Finance, Vol. 17, pp. 850-867, 2011. Available at SSRN:

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Travis Sapp (Contact Author)

Iowa State University - Department of Finance ( email )

3362 Gerdin Business Bldg.
Ames, IA 50011-1350
United States
515-294-2717 (Phone)
515-294-3525 (Fax)

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