The Value of Capital Market Regulation: IPOs Versus Reverse Mergers

Authors


  • We owe thanks to the workshop and seminar participants at York, Laval University, the Conference on Empirical Legal Studies, Cornell, the AFFI International Conference, and the Financial Management Conference 2010, as well as to Bernie Black, Ming Dong, Laura Field, Sofia Johan, and Gordon Roberts for many helpful comments.

Douglas Cumming, Professor and Ontario Research Chair York University—Schulich School of Business, 4700 Keele St., Toronto, Ontario M3J 1P3, Canada; email: dcumming@schulich.yorku.ca. Carpentier is Professor, Laval University and CIRANO Fellow; Suret is Jean-Marc Suret Professor, Laval University and CIRANO Fellow.

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 prerevenue stage by fulfilling each of the requirements of an initial public offering 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, reducing the heterogeneity of expectations and mispricing.

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