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Financing Development Stage Biotechnology Companies: Reverse Mergers vs. IPOs

Midwest Finance Association 2012 Annual Meetings Paper

Journal of Health Care Finance, 38(1): 32-54, 2011

32 Pages Posted: 29 Sep 2011 Last revised: 22 Nov 2014

Mark J. Ahn

Creighton University - College of Business Administration

Robert B. Couch

Willamette University - Atkinson Graduate School of Management

Wei Wu

Cal Poly Pomona

Date Written: January 15, 2011

Abstract

We examine reverse mergers (RMs) in the biotechnology industry and find that, when compared to initial public offerings (IPOs), RMs are smaller, have significantly lower market valuations relative to size, and generally invest less. We also find that RMs exhibit positive abnormal returns on the announcement date and throughout the first year after the RM event. In looking at liquidity measures, we find that RMs tend to be less liquid than IPOs and that illiquidity is greater during the six-month lock-up period following the RM event. Thus, RMs may be an appropriate alternative financing vehicle in capital intensive, high-risk biotechnology companies which require accessing deeper and larger pools of investors in public capital markets across multiple milestone periods in a 'pay for progress' environment.

Keywords: biotechnology, reverse merger (RM), initial public offering (IPO)

JEL Classification: G14

Suggested Citation

Ahn, Mark J. and Couch, Robert B. and Wu, Wei, Financing Development Stage Biotechnology Companies: Reverse Mergers vs. IPOs (January 15, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1927099 or http://dx.doi.org/10.2139/ssrn.1927099

Mark J. Ahn

Creighton University - College of Business Administration ( email )

United States

Robert B. Couch

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

Wei Wu (Contact Author)

Cal Poly Pomona ( email )

3801 W Temple Ave
Pomona, CA 91768
United States

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