A Research On The Formation And Operation Of Shell Comopany

In China, shell companies are always the first choice of many private companies which want to go public. The first reason is that approval standards of current Chinese approval based IPO system are very high. Secondly, the waiting period for IPO approval can be very long. This will consume these private companies huge economic and time cost. Therefore, shell companies are more convenient for them as an alternative vehicle for IPO. That's also why shell public companies gradually become rare resource in China and many of them, even with no sound financial performance, tried to decorate their performance to maintain their listing qualification through various earning management approaches. Meanwhile, speculation on these shells companies also generates many insider dealings. This phenomenon will not only distort the healthy investment concept in China, but also harm the normal valuation and pricing power of Chinese stock market.This article looks at this shell company phenomenon in China. First,it analyzes the constitutional root of these shell public companies, the common characteristics of these shells, approaches to keep listing qualification and the speculation in secondary stock market. Then, this article studies a case of Zhejiang WHWH Industry Co., Ltd., by means of statistical regression, vertical industry analysis and horizontal trend analysis, to find out how this company gradually became a shell company from a high quality listing company.The subject, Zhejiang WHWH Industry Co., Ltd, went public in 2006 by using a shell company vehicle. Its two business segments, chain hotel and real estates, are both relatively profitable, comparing their industry level. Its chain-hotel business even was once among the top 6 in Chinese chain-hotel industry. However, after IPO, this company didn't focus on its two operations but tried to recapitalize its business instead. It tried to sell its public company entity as a shell vehicle 4 times in 2008,2009, 2013 and 2014. During this period, it had to sell its chain hotel business and ran real estate business badly. Meanwhile, it deployed various approaches to manage its earnings to decorate its financial results to keep its listing qualification in Chinese stock market, such as premature recognition of income, manipulating one-time expense and benefit item. Besides, its recapitalization also indicates some clues that its big shareholders reduced their holdings in this company by stock speculating.In summary, this article tried to reach objective conclusion for the root of shell company phenomenon and relevant capitalization, to analyze the change these shell companies will face when registration based IPO system replace the approval based IPO system, and to provide some useful suggestions on solution for shell company phenomenon from the perspective of government and market investor.