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

Fridriksson, Gardar; Solbakken, Erik
Master thesis
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URI
https://hdl.handle.net/11250/2982318
Date
2021
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  • Master Thesis [4207]
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.

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