Backdoor Listings: How Some Struggling Chinese Listed Companies Become Hot Stocks

Backdoor listing, also referred to as reverse merger, occurs when a privately-held company go public by merging with an already-listed firm whose business may completely different from the acquirer’s. In China, the trend of backdoor listings is expected to accelerate due to delay of the registration-based IPO system and high threshold of IPO filings. During the last five years, more firms took advantage of backdoor listing as a shortcut to go public. Compared to 2014, companies announced backdoor listing deals increased by 24.3% in 2015.

By reverse merger, an underperforming stock is more likely to turn into a well-performing one after shares resume trading. Recognizing which firm will be a potential shell corporation is very important. Generally, the company in a relatively inactive traditional industry is attractive to buyers. However, industry is not the only criteria to evaluate. According to our comprehensive data, we found that a majority of shell companies are with relatively small market capitalization and light debt.

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