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Going Public in China: Reverse Mergers versus IPOs

Author

Listed:
  • Lee, Charles M. C.

    (Stanford University)

  • Qu, Yuanyu

    (Tsinghua University)

  • Shen, Tao

    (Tsinghua University)

Abstract

We study firms' choice to go public through reverse mergers (RMs) versus initial public offerings (IPOs) in a regime with strict entry regulations. Using a manually-assembled data set from China, we show that Chinese RM firms are larger and more profitable than IPO firms prior to public listing. Chinese RM firms also have superior post-listing performance, in terms of both operations and stock returns, compared to IPOs matched on industry and size. Unlike IPOs, Chinese RM firms do not underperform the market in the long run. These results are in sharp contrast to the evidence on RMs from developed countries. We trace these differences to China's stringent IPO policies, which appear to block even high-quality firms from accessing public markets.

Suggested Citation

  • Lee, Charles M. C. & Qu, Yuanyu & Shen, Tao, 2018. "Going Public in China: Reverse Mergers versus IPOs," Research Papers 3655, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3655
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    Cited by:

    1. Ni, Xiaoran & Peng, Yuchao & Shen, Ji & Vigne, Samuel A. & Wang, Nanxuan, 2025. "Available-for-sale is available for hoarding: When nonfinancial firms hold financial assets," Journal of Banking & Finance, Elsevier, vol. 171(C).
    2. Shi, Wenxiang & Fang, Peijie, 2023. "Delisting regulation and corporate financialization: Evidence from China," Finance Research Letters, Elsevier, vol. 58(PD).
    3. Huosong Xia & Juan Weng & Sabri Boubaker & Zuopeng Zhang & Sajjad M. Jasimuddin, 2024. "Correction to: Cross-influence of information and risk effects on the IPO market: exploring risk disclosure with a machine learning approach," Annals of Operations Research, Springer, vol. 332(1), pages 1289-1289, January.
    4. Lichao Lin & Adrian (Wai Kong) Cheung, 2024. "Pricing cloud stocks: Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 811-832, March.
    5. Zijian Cheng & He Gao & Zhangxin ( Frank) Liu & Sirimon Treepongkaruna, 2024. "Strategic choices in going public: ESG performance implications in China," Business Strategy and the Environment, Wiley Blackwell, vol. 33(8), pages 7708-7728, December.
    6. Ayman Nagi & Meike Schroeder & Wolfgang Kersten, 2021. "Risk Management in Seaports: A Community Analysis at the Port of Hamburg," Sustainability, MDPI, vol. 13(14), pages 1-20, July.
    7. Chang, Danting, 2021. "Fundamental anomalies and the size puzzle in China: A data mining approach," Finance Research Letters, Elsevier, vol. 42(C).
    8. Charles M C Lee & Yuanyu Qu & Tao Shen, 2023. "Gate Fees: The Pervasive Effect of IPO Restrictions on Chinese Equity Markets," Review of Finance, European Finance Association, vol. 27(3), pages 809-849.
    9. Cheng, Zijian & Li, Tianze & Liu, Zhangxin (Frank), 2025. "Unveiling the veil: Identifying potential shell firms using machine learning approaches," Pacific-Basin Finance Journal, Elsevier, vol. 92(C).
    10. Cheng, Zijian & Liu, Zhangxin (Frank) & Wang, Isabel Zhe & Zhao, Xingju, 2024. "Reverse merger audit fee premium: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 94(C).
    11. Xia, Yanchun & Wong, Sonia & Xin, Qingquan, 2024. "Auditor choice in reverse mergers: Evidence from China," The British Accounting Review, Elsevier, vol. 56(2).
    12. Tasawar Nawaz, 2024. "The iSPAC," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 311-324, July.
    13. Liang, Quanxi & Li, Qiumei & Lu, Meiting & Shan, Yaowen & Wang, Peipei, 2024. "Peer effects on corporate environmental protection: Competition, information cascades or career concerns?," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    14. Li, Zhiyong & Rao, Xiao, 2022. "Evaluating asset pricing models: A revised factor model for China," Economic Modelling, Elsevier, vol. 116(C).
    15. Wan, Die & Yang, Teng & Yang, Xiaoguang, 2021. "IPO relative difficulty, M&A option and size effect," Journal of Asian Economics, Elsevier, vol. 76(C).
    16. Xia, Yanchun & Liu, Yu & Guo, Shijun & Xia, Yufeng, 2024. "IPO suspensions and labor employment decisions: Evidence from China," Research in International Business and Finance, Elsevier, vol. 70(PB).
    17. Liu, Yu & Yang, Lingxuan & Xiong, Lu, 2023. "Performance commitments and the properties of analyst earnings forecasts: Evidence from Chinese reverse merger firms," International Review of Financial Analysis, Elsevier, vol. 89(C).
    18. Sudha Mathew & Sheeja Sivaprasad, 2024. "An empirical analysis of corporate sustainability bonds," Business Strategy and the Environment, Wiley Blackwell, vol. 33(4), pages 3299-3316, May.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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