The Value of Capital Market Regulation: IPOs Versus Reverse Mergers
We analyze the economic consequences of disclosure and regulation within a context of significant information asymmetry and lenient regulation. In Canada, firms can enter the stock market at a prerevenue stage by fulfilling each of the requirements of an initial public offering or using reverse mergers. This backdoor listing method implies a smoother oversight by the securities commission and a shorter process based on private placements. Controlling for several dimensions, including self‐selection, we find that the choice of the listing method and regulation strictness significantly influence the value and long‐run performance of newly listed firms. These results are consistent with theories suggesting that a commitment by a firm to a stricter regulatory oversight lowers the information asymmetry component of the cost of capital, reducing the heterogeneity of expectations and mispricing.
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