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What’s in a Shell? Analysing the Gain to Shareholders from Reverse Takeovers

39 Pages Posted: 29 Jul 2011  

Philip R. Brown

UWA Business School, M250; Financial Research Network (FIRN)

Andrew Ferguson

University of Technology, Sydney - Discipline of Accounting; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Peter Lam

University of Technology, Sydney - Discipline of Accounting; Financial Research Network (FIRN)

Date Written: November 30, 2010

Abstract

We examine the wealth effect of reverse takeover transactions to shareholders of shell companies. Using three return proxies, including buy-and-hold return, expert-based return and implied premium ratio, we find evidence strongly consistent with a significant gain to shareholders of shell companies participating in such transactions. We also argue that the source of the gain (shell premium) arises from the listing status embedded in the corporate shell of the public firms, which can be utilised by private firms as a vehicle for going public via the backdoor. Multivariate analysis also suggests that, after controlling for other potential factors, the magnitude of the shell premium is positively related to the number of shareholders on the shell company’s share register. In addition, we find that the invocation of the takeovers provisions of the Corporations Act has a positive effect on the gain to public firm shareholders by enhancing their bargaining power when negotiating the deal with the private firm.

Keywords: reverse takeover, reverse merger, backdoor listing, shell premium

Suggested Citation

Brown, Philip R. and Ferguson, Andrew and Lam, Peter, What’s in a Shell? Analysing the Gain to Shareholders from Reverse Takeovers (November 30, 2010). Available at SSRN: https://ssrn.com/abstract=1896004 or http://dx.doi.org/10.2139/ssrn.1896004

Philip R. Brown

UWA Business School, M250 ( email )

Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Andrew Ferguson

University of Technology, Sydney - Discipline of Accounting ( email )

P.O. Box 123 Broadway
Sydney, NSW 2007
Australia
02 9514 3565 (Phone)
02 9514 3669 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Peter Lam (Contact Author)

University of Technology, Sydney - Discipline of Accounting ( email )

P.O. Box 123 Broadway
Sydney, NSW 2007
Australia
02 9514 3926 (Phone)
02 9514 3669 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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