SPAC merger vs traditional IPO

Abstract: Special Purpose Acquisition Companies are surging in popularity as a way for companies to go public. As half of the initial public offerings on US stock exchanges were SPACs in 2021 there seems to be no indication of SPACs slowing down. This thesis examines the performance of companies that went public via a business combination with a SPAC in the year 2020 compared to companies that decided to take the traditional route with an IPO of their own. The paper focuses on two major events in the SPACs lifecycle, the definitive agreement and the merger. For the traditional IPOs it focuses on their performance during their first day of trading on a public US market. In order to capture the abnormal returns of the short- and long-term during these events, cumulative abnormal return and buy-and-hold abnormal returns are used. Furthermore, the results are discussed using the efficient market hypothesis and principal-agent theory. The sample data in this paper includes 64 companies that went public via a SPAC business combination in the year 2020 and 224 companies that went public via a traditional initial public offering in 2020. The paper finds that traditional IPOs outperform SPACs in both the short- and long-term with evidence that SPACs show positive abnormal returns in the short-term after the definitive agreement but show significant negative abnormal returns shortly after the merger. The traditional IPOs also perform its best during its earlier stages with significant abnormal returns after its first day of trading but then sees a decline as time goes on. Concluding, in line with previous research, that companies that decides to go public via a SPAC generally performs worse both in the short- and long-term compared to companies going public via a traditional IPO.