SPAC Post-Merger Performance
(2021) NEKN02 20211Department 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:
http://lup.lub.lu.se/student-papers/record/9055259
- author
- Söderman, Tim LU and Hjorter Blomberg, Rasmus LU
- supervisor
- organization
- course
- NEKN02 20211
- year
- 2021
- 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}}, }