Shell Games: The Long Term Performance of Chinese Reverse Merger Firms

56 Pages Posted: 4 Oct 2012 Last revised: 20 Sep 2014

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Kevin K. Li

University of California, Riverside (UCR) - UCR School of Business Administration (SoBA)

Ran Zhang

Guanghua School of Management

Date Written: September 16, 2014

Abstract

We examine the financial health and performance of reverse mergers (RMs) that became active on U.S. stock markets between 2001 and 2010, particularly those from China (around 85% of all foreign RMs). As a group, RMs are early-stage companies that typically trade over-the-counter. Chinese RMs (CRMs), however, tend to be more mature and less speculative than either their U.S. counterparts or a group of exchange-industry-size matched firms. As a group, CRMs outperformed their matched peers from inception through the end of 2013, even after including most of the firms accused of accounting fraud. CRMs that receive private-equity (PIPE) financing from sophisticated investors perform particularly well. Overall, despite the negative publicity, we find little evidence that CRMs are inherently toxic investments. Our results shed light on the risk-performance trade-off for CRMs, as well as the delicate balance between credibility and access in well-functioning markets.

Keywords: Reverse mergers, listing requirements, Chinese firms, accounting fraud, cash flow life cycle, private-equity (PIPE) financing

JEL Classification: G34, M41, N20

Suggested Citation

Lee, Charles M.C. and Li, Kevin K. and Zhang, Ran, Shell Games: The Long Term Performance of Chinese Reverse Merger Firms (September 16, 2014). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2155425 or http://dx.doi.org/10.2139/ssrn.2155425

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Kevin K. Li

University of California, Riverside (UCR) - UCR School of Business Administration (SoBA) ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States

Ran Zhang

Guanghua School of Management ( email )

Beijing, 100871
China
86-10-62756911 (Phone)

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