SPAC Post-Merger Performance

Abstract: Special purpose acquisition companies (SPACs) are shell companies with no operational assets with the sole purpose of using the raised capital from the initial public offering (IPO) to acquire a private target firm within a predetermined time frame. This financial vehicle has in recent years surged in interest and media coverage. Nevertheless, the long-term performance of the SPACs post-merger is vastly understudied. Existing literature tends to be focused on the short-term, focusing on the performance on the day of the announcement and a few days to half a year after the merger. In this paper, we aim to shed some light on the long-term performance in connection to the incentive structure of SPACs, the time limit on the acquisition, and the quality of the management. We find that the buy-and-hold return (BHAR) of SPACs significantly underperforms the market 3, 6, 12, 24, and 36 months after the acquisition date, worsening as time progresses. Additionally, we find that the longer an acquisition takes, the worse the return of the target firm becomes. We also find significant results of the CEO expertise coefficient in most models in the regression analysis, meaning that high-quality management can influence abnormal returns positively. Finally, we endeavor to show the magnitude of influence of the variables tested in a mean and median comparison. Ultimately, we have found that SPACs perform poorly in the long run due to an unhealthy incentive structure that encourages management to acquire poor firms over no firms for short-term personal gain.