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The Value of Capital Market Regulation: IPOs versus Reverse Mergers

Author

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  • Cécile Carpentier
  • Douglas Cumming
  • Jean-Marc Suret

Abstract

We analyze the economic consequences of disclosure and regulation within a context of significant information asymmetry and lenient regulation. In Canada, firms can enter the stock market at a pre-revenue stage by fulfilling each of the requirements of an initial public offerings or using reverse mergers. This backdoor listing method implies a smoother oversight by the securities commission and a shorter process based on private placements. Controlling for several dimensions, including self-selection, we find that the choice of the listing method and regulation strictness significantly influence the value and long-run performance of newly listed firms. These results are consistent with theories suggesting that a commitment by a firm to a stricter regulatory oversight lowers the information asymmetry component of the cost of capital, reduces the heterogeneity of expectations and mispricing. This version was updated in December 2010. Nous étudions les conséquences économiques des exigences en matière de réglementation des valeurs mobilières dans une situation où l'asymétrie informationnelle est importante et les contraintes réglementaires limitées. Au Canada, les entreprises peuvent s'inscrire en Bourse alors qu'elles ne rapportent pas de revenu. Elles peuvent utiliser le processus classique du premier appel public à l'épargne ou utiliser une méthode d'inscription déguisée par prise de contrôle inversée. La supervision des autorités en matière de valeurs mobilières est plus légère dans ce cas, et le processus d'inscription se fait beaucoup plus rapidement. En tenant compte des multiples caractéristiques incluant l'endogénéité du choix du mode d'entrée, nous montrons que le choix du mode d'entrée et donc de la rigueur de la supervision influence de façon significative la valeur et la performance boursière à long terme des émetteurs. Nos résultats suggèrent que l'entreprise qui se soumet à une supervision plus stricte diminue l'asymétrie informationnelle, le coût du capital, la dispersion des anticipations et les erreurs d'évaluation des investisseurs. Cette version a été mise à jour en décembre 2010.

Suggested Citation

  • Cécile Carpentier & Douglas Cumming & Jean-Marc Suret, 2009. "The Value of Capital Market Regulation: IPOs versus Reverse Mergers," CIRANO Working Papers 2009s-06, CIRANO.
  • Handle: RePEc:cir:cirwor:2009s-06
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    File URL: http://www.cirano.qc.ca/files/publications/2009s-06.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Disclosure; Securities Regulation; Initial Public Offerings; Reverse Mergers; Listing Standards ; Divulgation; réglementation des valeurs mobilières; prise de contrôle inversée; norme minimales d'inscription en Bourse;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G1 - Financial Economics - - General Financial Markets

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