Sneaking in the Back Door? An Evaluation of Reverse Mergers and IPOs

Graduate Thesis Or Dissertation

Citations

Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/9593tv301

Abstract

I examine whether the financial reporting quality of firms that access capital markets through a reverse merger 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 uniformly exhibit lower earnings quality as captured by several earnings attributes established in prior literature: accrual quality, earnings persistence, earnings predictability, cash persistence, cash predictability, earnings smoothness, conservatism, timeliness, and value relevance. I further find that these differences are attenuated for reverse merger firms with higher levels of institutional ownership. This study informs about the role of regulators and institutional investors in financial reporting. Finally, given recent U.S. Securities and Exchange Commission (SEC) enforcement actions against Chinese reverse merger firms, I use a difference in differences technique and find that Chinese reverse merger firms exhibit higher financial reporting quality than all other reverse merger firms.

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