Going Public in China: Reverse Mergers versus IPOs

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.