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Shell games: On the value of shell companies

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  • Floros, Ioannis V.
  • Sapp, Travis R.A.
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    Abstract

    A reverse merger allows a private company to assume the current reporting status of another company that is public. This can be done quickly, without fundraising, road show, underwriter, substantial ownership dilution, or great expense. Private firms that go public via reverse merger are often motivated by the need to quickly secure financing through privately placed stock (PIPEs) and the desire to make acquisitions using stock as payment. In each of the last eight years reverse mergers have outnumbered traditional IPOs as a mechanism for going public, and reporting shell companies are providing fuel for much of this growth. We study 585 trading shell companies over the period 2006-2008. The purpose of most of these shell firms is to find a suitor for a reverse merger agreement. These companies have no systematic risk, operations, or assets, and their share price tends to decline over time. Yet, these firms have investors. When a takeover agreement is consummated, shell company three-month abnormal returns are 48.1%. We argue that this exceptional return is compensation to investors for shell stock illiquidity and the uncertainty of finding a reverse merger suitor. We show that shell company returns are much greater at the consummation of a merger than those of a similar entity that in dollar terms is more popular among investors -- Special Purpose Acquisition Companies (SPACs).

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 17 (2011)
    Issue (Month): 4 (September)
    Pages: 850-867

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    Handle: RePEc:eee:corfin:v:17:y:2011:i:4:p:850-867

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Shell company Reverse merger Reverse takeover Reverse acquisition SPACs PIPEs;

    References

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    Cited by:
    1. Shachmurove, Yochanan & Vulanovic, Milos, 2013. "SPACs in Shipping," EconStor Preprints 88633, ZBW - German National Library of Economics.
    2. Shachmurove, Yochanan & Vulanovic, Milos, 2014. "SPACs with focus on China," EconStor Preprints 92407, ZBW - German National Library of Economics.
    3. Lakicevic, Milan & Shachmurove, Yochanan & Vulanovic, Milos, 2014. "Institutional changes of Specified Purpose Acquisition Companies (SPACs)," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 149-169.

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