Sneaking in the back door? An evaluation of reverse mergers and IPOs

Sneaking in the back door? An evaluation of reverse mergers and IPOs I examine whether the financial reporting quality of firms that access capital markets through reverse mergers differs from that of firms that rely on the traditional and more onerous IPO process. Using a broad sample of reverse merger firms and a propensity-score matched sample of IPOs, I find that reverse merger firms exhibit lower earnings quality as measured by several earnings attributes established in prior literature: accrual quality, earnings persistence, earnings predictability, cash persistence, cash predictability, earnings smoothness, timeliness, and value relevance. I document similar results for firms with low levels of institutional ownership. Differences in earnings quality, however, are attenuated for reverse merger firms with higher levels of institutional ownership. Given recent U.S. Securities and Exchange Commission enforcement actions against Chinese reverse merger firms, I also use a difference-in-differences technique and find that the lower financial reporting of reverse merger firms is actually driven by the non-Chinese reverse merger firms. Review of Quantitative Finance and Accounting Springer Journals

Sneaking in the back door? An evaluation of reverse mergers and IPOs

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Springer US
Copyright © 2015 by Springer Science+Business Media New York
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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