| As Chinese stock market implements strict constraints on IPO,listing qualification has become a scarce resource.Reverse merger has become an important alternative for companies to obtain listing qualifications in the Chinese stock market.The scarcity of listing qualifications gave rise to the high cost of taking control of shell company during the reverse merger process.Therefore,shell companies were always acquired at a high premium,and were favored by investors.In order to obtain such high returns,investors try to find the next company to be reverse merged,and speculation has become a unique and enduring theme in Chinese stock market.Holding the stocks of a listed company with backdoor expectations can not only obtain the income from the operation,but also obtain the lottery value of the company that may be reverse merged,that is,the shell value(Chen et al.,2019).In addition,the regulatory authorities also pay attention to the impact of shell value on stock returns,and try to prevent shell value from destroying the valuation system.Therefore,exploring the relationship between the shell value and the expected return has good practical significance.However,not all listed companies have backdoor expectations.On the one hand,listed companies of Chi Next cannot be reverse merged due to regulatory requirements;on the other hand,the benefits of listing qualifications are limited,and there is boundary for the selection of targets.Liu et al.(2019)also found that 83%of reverse mergers on the Chinese stock market between 2007 and 2016 occurred in the small-cap companies.This shows that reverse mergers mainly occur in smallcap listed companies.Therefore,the shell value is mainly reflected in the stock prices of listed companies with small market capitalization.There is an inherent economic connection between the shell value and the stock price of small-cap listed companies,especially when the market is downside,the shell value has a more obvious impact on the stock price.On the one hand,when the stock price tends to fall,the shell value can play a role as a platform to support the stock price;on the other hand,reverse mergers often occur in the bear market,which is more likely to obtain considerable backdoor returns to hedge downside risk.Therefore,this paper explores the relationship between the shell value and the expected return in the small-cap stocks,and attempts to analyze it from the perspective of downside risk.At the same time,empirical research on asset pricing has made great progress in the past thirty years,and new asset pricing models have been proposed,but there are still some portfolios that cannot be effectively explained by existing asset pricing models.In the US stock market,when the Fama-French five-factor model is used to explain the small-growth stock portfolio,there is still a significantly negative excess return(Fama and French,2015).In the Chinese stock market,Liu et al.(2019)pointed out that after excluding listed companies whose market capitalization is lower than the last 30%,the Chinese three-factor model can better explain the stock return.These studies show that the existing asset pricing model has insufficient explanatory power for small-cap stocks.Under the background of Chinese stock market,there is a natural relationship between shell value and the returns of smallcap stocks.Could the shell value be a new factor?Based on these backgrounds,this paper summarizes the relevant literature on shell value,explores the relationship between shell value and the expected return of small-cap stocks,and analyze the causes of the shell value premium,and explore the explanatory power and strategic performance of the shell value premium,and finally put forward some advice.From the perspective of downside risk,this paper finds that listed companies with backdoor expectations have lower downside risk exposure,leading to investors willing to accept lower expected returns,that is,the shell value has negative effects on expected returns.The main empirical research finds that:(1)The higher the shell value beta,the lower the expected return of stocks,and there is a significantly negative shell value premium in the small-cap stocks.(2)Shell value premium cannot be explained by mispricing,but is caused by investors' seeking for listed companies with higher backdoor expectations.(3)The shell value premium can provide an effective incremental explanation for the returns of small-cap stocks.Therefore,the shell value is an important factor in explaining the returns of smallcap stocks in the Chinese stock market.This paper is proceeding along the logic of "discovering-explaining-applying shell value premium".The first question of this article is to discover the shell value premium,that is,to examine the relationship between shell value and the expected return of small-cap stocks;secondly,to explain the shell value premium,that is,to explore the cause of the shell value premium;Finally,to apply the shell value premium,that is,to examine whether the shell value premium helps to better explain the return of small-cap stocks,and whether it can help investors invest better.The main contributions of this article are as follows:First,this paper discovers that there is a shell value premium in small-cap stocks in the Chinese stock market.This study found that the shell value sensitivity has a significant negative correlation with the expected return of small-cap stocks,and the monthly average return of the group with the lowest shell value beta is 1.03%higher than that of the highest group.The existing literature about reverse mergers mainly focuses on the event study,and rarely pays attention to the impact of reverse mergers on the other stock returns.However,this article finds the shell value premium,which helps to deepen the understanding of the relationship between reverse mergers and stock returns,and enriches the research literature in the field of reverse mergers.Second,this article finds that the shell value premium is not mispricing,but from risk compensation,which is caused by investors' pursuit of backdoor expectations.Listed companies with higher shell value beta have higher backdoor expectations,and therefore have higher good uncertainty and lower downside risk exposure.For this reason,investors are willing to pay higher stock prices and accept lower expected return.This explanation provides an empirical evidence for the regulatory authorities to formulate a reverse mergers regulatory policy.Third,this paper finds that the shell value premium can provide an effective incremental explanation for the returns of small-cap stocks.This paper finds that the shell value premium can provide effective incremental explanatory power for the individual stock returns and anomalies portfolios on the basis of existing asset pricing models.In addition,this article also finds that the monthly average return of the shell value premium performs the best,indicating that this premium can also help investors invest better. |
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