Journal of Economics and Management Volume 16, No. 1 March, 2020

Intended Use of Proceeds and Long-run Performance of Reverse Mergers: Evidence from Taiwan

Chin-Chi, Liu

Department of Finance, College of Business and Management, Ling Tung University, Taiwan.

Abstract

This paper examines the long-run performance of reverse merger (RM) transactions in the Taiwan stock market. Shell companies generally issue private investment in public equity (PIPEs) in order to raise equity capital in the year following such transactions. Based on the intended use of capital, PIPEs issuers are classified into three categories: investment, recapitalization, and general corporate purposes. This study finds that shell companies in the investment category experience better long-term performance in the subsequent three years, which is consistent with the view that RM firms with strategic plans to expand investments in capital expenditures are signaling profitable investment opportunities. However, shell companies under the categories of recapitalization or general corporate purposes exhibit no or poor subsequent underperformance, suggesting that RM deals in these two categories are speculative in nature and have short-sightedness that destroys long-term shareholder wealth.

Keywords：Reverse Mergers, Private Investment in Public Equity, Intended Use of Proceeds, Long-Run Performance.

JEL Classifications：G31, G32.

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