Reverse Takeover and Firm Survivability

Abstract

Manuscript Type: Empirical

Research Question/Issue: This paper investigates how firm financial characteristics and governance characteristics affect reverse takeovers’ survival.

Research Findings/Insights: Using a sample of reverse takeovers that took place during the 2000–2009 period in the U.S., we find that firms with reverse takeover are more likely to survive when they have higher interest coverage ratio of the shell, while its profitability (return on equity) is lower just before the reverse takeover and the new firm is relatively smaller than the public shell. In addition, firms with new CEOs are more likely to survive than firms without CEO replacement, and this effect is pronounced when the shell has lower liquidity.

Theoretical/Academic Implications: Our findings suggest that the survivability of reverse takeovers relies both on the financial conditions of the merging firms and on their presumed value-enhancing governance characteristics.

Practitioner/Policy Implications: Conventionally, firms try to improve the financial conditions of the merging firms to survive in the reverse takeover. Our empirical results however stress that firms should also practice good corporate governance in order to be successful in reverse takeover.

Keywords: Reverse Takeover, Corporate Governance, Firm Survivability, Going Public, Going Private

JEL Classification: G21, G31, G34