Reverse Mergers: The Chinese Experience
Chinese reverse mergers (CRMs) claim to provide easy entry to the U.S. and international markets. Recently, a large number of Chinese firms using reverse merger transactions have been listed on the U.S. stock exchanges. We review the historical use and mechanics of these reverse mergers, and contrast them with initial public offerings (IPOs). We also explore settlements of securities class action lawsuits involving Chinese firms. Our analysis shows that larger, more reputable Chinese firms are significantly less likely to pursue reverse mergers. We also find that CRM firms are more likely to be subject to class action litigation in the U.S and that the settlement amounts are smaller for CRM firms than for Chinese IPO firms. Our analysis further indicates that CRM firms significantly underperform the Chinese IPO firms. Thus, the evidence suggests that CRMs are not substitutes for Chinese IPOs.
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