A reverse takeover as an exit strategy of venture capital: Korean evidence

• We investigate the difference between IPOs, sellouts, or reverse takeovers.
• VC-backed firms tend to select reverse takeovers rather than IPOs or sellouts to exit.
• Reverse takeover firms tend to underperform than IPO firms in long term.

We investigate the characteristics of firms that choose between three different methods, IPOs, sellouts, or reverse takeovers, to obtain exchange listings using Korean data over the period of 2000–2010. We document that VC-backed firms tend to choose reverse takeovers rather than IPOs or sellouts to go public after controlling for other determinants. We also find that VC-backed reverse takeover firms have higher leverage, lower profitability, and higher information asymmetry than VC-backed IPO firms. The results suggest that venture capital uses a reverse takeover as an alternative exit method from their portfolio firms since reverse takeovers constitute a fast and low-cost going-public mechanism. We then find that reverse takeover firms perform worse than IPO firms over the long term regardless of whether they are VC-backed or not.