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SPAC Post-Merger Performance

Söderman, Tim LU and Hjorter Blomberg, Rasmus LU (2021) NEKN02 20211
Department of Economics
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... (More)
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. (Less)
Please use this url to cite or link to this publication:
author
Söderman, Tim LU and Hjorter Blomberg, Rasmus LU
supervisor
organization
course
NEKN02 20211
year
type
H1 - Master's Degree (One Year)
subject
keywords
Special Purpose Acquisition Company (SPAC), Incentive Structure, Moral Hazard, Long-Term Performance, Management Expertise
language
English
id
9055259
date added to LUP
2021-10-26 08:18:14
date last changed
2021-10-26 08:18:14
@misc{9055259,
  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.}},
  author       = {{Söderman, Tim and Hjorter Blomberg, Rasmus}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{SPAC Post-Merger Performance}},
  year         = {{2021}},
}