Spaculative Sentiment - An Analysis of the Impact of Investor Sentiment on SPAC Activity and Performance

Abstract: SPACs have experienced a puzzling surge in popularity despite academics documenting their severe historic underperformance. This paper adds a new layer to previous research by investigating whether market sentiment can explain SPAC activity and performance. We find that SPAC activity rises when investor sentiment falls. Furthermore, we spot that high investor sentiment partially explains SPACs short-term underperformance over six months after a SPAC merger is made effective. Finally, we find indications of cross-sectional and conditional effects of sentiment on SPAC returns. The cross-section of returns is visible through increased fluctuations in the returns of companies that are more difficult to value and arbitrage. Further, investor sentiment displays conditional effects contingent on SPACs age, level of indebtedness, and profitability. When sentiment is high, then young, indebted, and unprofitable SPACs exhibit higher relative returns. When sentiment is low, investors alternate their preference towards older, less indebted, and profitable firms.