Using a comprehensive sample of reverse merger (RM) transactions, we examine the effects of China’s IPO regulations on the prices and returns of its publicly listed stocks. During 2007-2015, unlisted Chinese firms paid an average of 3 to 4 Billion RMB for each listed shell, an amount exceeding 2/3 of the median market capitalization of a listed firm. This large shell premium varies over time and is sensitive to regulatory shocks. In the cross-section, a portfolio that longs (shorts) the highest (lowest) estimated shell probability (ESP) firms earns substantial abnormal returns. Adding an ESP-based factor to five common factors improves return attribution and eliminates the notoriously large Size premium. Consistent with theory, ESP also explains the sensitivity of prices to corporate earnings, and predicts the likelihood of firms to undertake major asset restructurings (MARs). We conclude China’s IPO regulations impose a high cost on the functional efficiency of its financial system.