Alternatives for Going Public: Evidence from Reverse Takeovers, Self-Underwritten IPOs, and Traditional IPOs

Choice between alternative routes to go public: backdoor listing versus IPO

“…Balance sheet liquidity (LIQ) is proxied by the ratio of cash and equivalents to total assets. Gleason et al (2006) find that RTO firms have a higher level of financial leverage then their matched IPO counterparts. It is also possible that BDL firms may be burdened by debt as a result of the assumption of the debt incurred previously by the shell companies.…”

“…Proponents of alternative ways for going public argue that this significant cost of underpricing can be reduced or avoided by doing a backdoor listing instead. Indeed, Gleason et al (2006) show that RTO firms have a mean (median) first trading day return of 7.88 (2.12) percent, as compared to 23.05 (9.15) percent for control IPO sample. To examine this conjecture, first-day return (DAY1_RET) for both the BDL and IPO samples is constructed, following Gleason et al (2005).…”

“…In general, RTO or RM firms are found to be smaller, younger and less profitable than their IPO counterparts. They also tend to have lower balance sheet liquidity and higher leverage (Gleason et al 2006). RM firms tend to exhibit higher information asymmetry as a result of no prospectus requirement (Floros 2008;).…”

“…In addition, evidence reported by Gleason et al (2006) suggests that RTO firms tend to have lower liquidity than matched IPOs. Though a case can be made for BDL firms to exhibit a higher level of liquidity if the shell company they have backed into is essentially a "cash box", the fact that many shell companies are financially distressed (to various extents) makes this scenario less plausible.…”

Seasoned equity offerings by small and medium-sized enterprises

“…This empirical approach is the one most commonly used in analyses of IPOs (Boutron et al 2007; Table 2) and SEOs (Eckbo et al 2007; Table 18). It is also used to study the performance of small capitalization stocks (Gleason et al 2006;Locke and Gupta 2008). The BHARs are estimated relative to returns of reference portfolios composed of companies of comparable size and book-to-market ratio.…”