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Corporate Governance

: The Harvard Law School Corporate Governance Blog

A Test of IPO Theories Using Reverse Mergers

By Harvard Law School Program on Corporate Governance

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Editor?s Note: The following post comes to us from Paul Asquith, Professor of Finance at the M.I.T. Sloan School of Management, and Kevin Rock, Professor of Finance at the Chicago Booth Graduate School of Business.

In the paper, A Test of IPO Theories Using Reverse Mergers, which was recently made publicly available on SSRN, we investigate many of the current theories explaining why IPO returns are large and significantly positive on the issuance date. Reverse mergers are an alternative method to IPOs for going public, and announcement day price reaction to private reverse mergers is comparable to the initial day price reaction to IPOs. In a private reverse merger, a private firm goes public by exchanging their stock for the stock in a public firm. After a reverse merger there are new stockholders, but the private firm?s old stockholders own the majority of public stock in the surviving firm. When we use reverse mergers as an out-of-sample test, most of the theories developed thus far to explain the market?s reaction to IPOs appear to be invalid.

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Full post as published by The Harvard Law School Corporate Governance Blog on February 23, 2011 (boomark / email).