Tuesday, February 06, 2024 5:40:49 AM
Our results present a fascinating choice for investors. Namely, does it make sense to invest in an empty shell firm that has no assets or operations? Our results suggest that such an investment is rational as long as the probability of a RM happening soon is high. In the event of a RM deal, the shell firm returns are substantial. However, the wait can be painful. Over time, the shell burns cash to meet ongoing reporting costs and the share price tends to fall. Being able to identify shells that are more likely to consummate a deal sooner thus becomes key. Also, the extent to which shell firms are an investable alternative asset largely depends upon the depth of this rather illiquid market. Most shell firms have fewer than three market makers and trading tends to be thin and concentrated among a relatively small shareholder base. The median number of shareholders in our shell sample is 57 and on average 12% of shell outstanding shares are held by shell managers. Further, the median quoted half spread is 22.3%, showing that transaction costs for an investment in shell firms are non-trivial. We argue that the substantial average return surrounding a RM is compensation for shell stock illiquidity and the uncertainty of finding a reverse merger suitor. Further, the payoff from a shell investment is marginally sufficient to justify the growth in the number of shells alongside the growing RM industry.
Only time I was wrong was when I thought I was, but I really wasnt.
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