• Based on a sample of 111 SPACs we find that the return following a merger is significantly negative. Evidently, SPAC investors, while protecting themselves from downside risk, are also sacrificing the large potential merger returns that ordinary shells offer.
• 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.

Earlier Post: Special Purpose Acquisition Company in Malaysia – Caveat Emptor by LIN Liye

http://ac.els-cdn.com/S0929119911000198/1-s2.0-S0929119911000198-main.pdf?_tid=030228fc-b1fc-11e4-8cf6-00000aacb35e&acdnat=1423665846_0f55cf5757370a7b4540795f7ce538b0

Journal of Corporate Finance

Volume 17, Issue 4, September 2011, Pages 850–867

Shell games: On the value of shell companies ^☆

Ioannis V. Floros^a, 1, , Travis R.A. Sapp^b, , 

Abstract

A reverse merger allows a private company to assume the current reporting status of another company that is public. This can be done quickly, without fundraising, road show, underwriter, substantial ownership dilution, or great expense. Private firms that go public via reverse merger are often motivated by the need to quickly secure financing through privately placed stock (PIPEs) and the desire to make acquisitions using stock as payment. In each of the last eight years reverse mergers have outnumbered traditional IPOs as a mechanism for going public, and reporting shell companies are providing fuel for much of this growth. We study 585 trading shell companies over the period 2006–2008. The purpose of most of these shell firms is to find a suitor for a reverse merger agreement. These companies have no systematic risk, operations, or assets, and their share price tends to decline over time. Yet, these firms have investors. When a takeover agreement is consummated, shell company three-month abnormal returns are 48.1%. We argue that this exceptional return is compensation to investors for shell stock illiquidity and the uncertainty of finding a reverse merger suitor. We show that shell company returns are much greater at the consummation of a merger than those of a similar entity that in dollar terms is more popular among investors — Special Purpose Acquisition Companies (SPACs).

https://papers.ssrn.com/sol3/Data_Integrity_Notice.cfm?abid=2558481

Information in Financial Statement Misstatements at the Engagement Partner Level: A Case for Engagement Partner Name Disclosure?

Wuchun Chi National Chengchi University (NCCU) – Department of Accounting

Ling Lei Lisic George Mason University

Linda A. Myers University of Arkansas
Mikhail Pevzner University of Baltimore – Merrick School of Business
January 2015

Abstract: 
Using data from Taiwan where engagement partner names are disclosed and misstatements of clients’ annual financial statements to proxy for audit quality, we examine whether audit quality at the engagement partner level persists, and whether an engagement partner’s reputation for prior audit quality is informative about current audit quality. We find that at the engagement partner level, year t-1 misstatements made by other audit clients predict year t misstatements for clients without a history of misstatements in the preceding three years, but this effect is mitigated by engagement partner experience. In addition, we find a positive association between the incidence of restatements made by an engagement partner’s clients in the previous two or three years and the likelihood that a different client misstates in the current year, suggesting that partner-level restatements provide information about future audit quality. Finally, we find that an engagement partner’s reputation for past client misstatements (as disclosed in restatements) is associated with a higher likelihood of that partner losing existing clients and a lower likelihood of that partner attracting new audit clients. Collectively, our results suggest that engagement partner identification can reveal information that is informative about audit quality and affects stakeholder perceptions of audit quality, providing some support for the Public Company Accounting Oversight Board’s proposal to disclose the names of engagement partners in the U.S.