Impact of the liability of foreignness, domicile of incorporation and an institutional change on reverse merger firms’ capital-raising performance

Purpose The purpose of this study is to examine how the liability of foreignness (LOF), choice of incorporation and an institutional change independently and jointly affect a reverse merger (RM) firm’s capital-raising performance. Design/methodology/approach The study draws on the data of shell reverse merger transactions in the USA from 2007 to 2016. Findings This paper finds that LOF and the choice of incorporation as a signal have a significant effect on RM firms’ capital-raising performance. In addition, this study finds that the effectiveness of the signaling can be affected by LOF. Finally, this paper finds that an institutional change that lowers the entry barrier to the initial public offering (which is a superior alternate to an RM) affects the impacts of LOF and signaling on RM firms’ capital-raising performance. Originality/value The study contributes to the international business literature by examining the RM (which has been an under-researched topic in the literature) by drawing on the LOF framework. The study finds that LOF and the choice of state for incorporation affect RM firms’ capital-raising performance; moreover, these relationships are affected by an institutional change.

Revisiting conceptual framework of governance & financial factors in reverse merger performance

The performance reverse takeover firms or reverse merger firms have been studied in correlation to traditional initial public offering (IPO) performance. However, those studies have not been extensive enough to explain the contributing factors of the reverse merger performance. Some of the previous studies have compared the implication of corporate governance attributes and the implication of the financial conditions of the involving firms to the reverse merger firm performance. However, there are more areas to be assessed in the perspective of corporate governance, including the variety of ownership structure and its effect on the risk-taking behavior and reputation. This study proposes a new conceptual model on how corporate governance and financial characteristics influence the reverse merger performance, constructed from the literature review. The conception of the reverse merger characteristics and how they are associated with the firm performance is expected to support investor in their investment decision.

Editorial note

This issue of the journal provides contributions to the exploration of subjects related to different areas of research: public and private sectors, capital market, merger and acquisition, corporate governance and risk management. In particular, the issues dealt with concern: external audit in health care organizations, risk reporting and credit derivative disclosure in the banking sector, risk based management control, governance and financial factors in reverse merger, price to earnings ratio and interest rates in the capital market

Going Public in China

This chapter provides an analysis of companies undertaking a reverse merger (RM) as opposed to an initial public offering (IPO) on Chinese stock markets. It introduces a new data set of RMs on Chinese exchanges to examine the financial characteristics of firms that choose an RM over an IPO. The authors find that Chinese RM firms have lower liquidity, higher leverage, and lower asset turnover than firms that go public through an IPO. Promoters of Chinese RM firms also hold more shares as compared with IPOs. Finally, Chinese RM firms have higher return on assets and lower underpricing at listing. The results identify several characteristics of Chinese RM firms that differentiate them from firms that go public via an RM in Western markets, suggesting that Chinese institutions and stage of stock market development may impact the decision to go public.