The Performance of SPACs : An empirical study of the performance of SPAC stocks and warrants in the deSPAC period.

Abstract

In this master thesis, we examine the performance of 130 SPAC stocks and warrants in the deSPAC period from 2012 to 2021. We find buy-and-hold returns for stocks and warrants coherent with current literature. Measured over 12 months, the average stock return is -10,4% and the average warrant return is 22,8%. We measure excess return by the Fama French three-factor model. We find no evidence of risk- adjusted excess stock return when looking at rolling calendar-time portfolios for stocks, implying that the market prices the stocks correctly at the time a SPAC merges with a target company. In contrast, we find sufficient evidence to conclude that the warrants of the respective stocks provide a positive risk-adjusted excess return when examined through the same framework. To our knowledge, we are the first to evaluate the risk- adjusted excess return on warrants. By cross-sectional analyses, we find that the excess return is driven by the redemption ratio that a SPAC encounters upon its merger. This may be explained by the fact that many SPACs see large redemption ratios due to redemptions from investors who are solely invested for the SPAC period, and redeem their shares regardless of the proposed merger’s quality. Consequently, the market misinterprets these redemptions as signals of bad-quality mergers, and undervalue the warrants at the merger date.