A Comparison of Penny Stock Initial Public Offerings and Reverse Mergers as Alternative Mechanisms to Going Public

51 Pages Posted: 26 Aug 2009 Last revised: 5 Dec 2009

Ioannis V. Floros

Iowa State University - Department of Finance

Kuldeep Shastri

University of Pittsburgh - Finance Group

Date Written: August 24, 2009

Abstract

We compare firms that go public using penny stock initial public offerings (PSIPOs) to those using reverse mergers (RMs). Firms using RMs tend to be highly information asymmetric in contrast with the existing going public theory. Firms tend to opt for the RM path with the intent to acquire a greater market share using stock as a medium of payment. When compared to PSIPOs, RMs are small, have low profitability, are in the development stage with limited operating history, and plan high research and development expenditures. RM firms hoard cash, which they get through Private Investments in Public Equity (PIPEs) that are consummated concurrently with the RM. PIPE investors and insiders maintain a high ownership stake following a RM. Managers of firms engaging in PSIPOs are more likely to cash out.

Keywords: Reverse mergers, reverse takeovers, penny stock IPOs, shell companies, going public, PIPEs

JEL Classification: G19, G32, G34

Suggested Citation

Floros, Ioannis V. and Shastri, Kuldeep, A Comparison of Penny Stock Initial Public Offerings and Reverse Mergers as Alternative Mechanisms to Going Public (August 24, 2009). Available at SSRN: https://ssrn.com/abstract=1460979 or http://dx.doi.org/10.2139/ssrn.1460979

Ioannis V. Floros (Contact Author)

Iowa State University - Department of Finance ( email )

3346 Gerdin Business Bldg
Ames, IA 50011-1350
United States
515-294-2269 (Phone)
515-294-3525 (Fax)

Kuldeep Shastri

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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