Premium, ownership and operating performance in RTO

Abstract

A reverse takeover is an alternative method of listing instead of IPO. Compared to IPO, firms using RTO can avoid the stringent requirement of IPO and disclose less information. Hence, these transactions were viewed as suspicious transactions. The U.S-SEC also issued the warning that investors should be careful when considering investing in the RTO firm. However, it is unlikely that investors in the market can separate between the good RTO firm and the bad RTO firm because of the loose requirement of RTO which led to the arising of asymmetric information between investors and RTO firm. As a result, in this study, we aim to raise the research question about “Can we separate between good performance RTO firm and bad performance RTO firm?”. We examine 59 reverse takeovers in the U.S. stock market during 2007-2018. We then suggest that the premium that a private firm paid to a public firm and ownership that a private firm obtained from a public firm after a merger might be a signal to separate between good performance RTO and bad performance RTO. By examining the relationship between these two variables and change in operating performance, we cannot find evidence that these two variables can play a role to imply post-RTO operating performance.