SPACs: Kinder Surprise Eggs with a Bad After-taste : An Empirical Analysis of the Determinants of SPAC Mergers and DeSPAC Returns in the U.S.

Abstract

Special purpose acquisition companies (SPACs) have received strong attention and taken a significant market share compared to traditional IPOs in the last couple of years. This thesis analyses the determinants of why companies go public through a SPAC, instead of a regular IPO, alongside determinants of post-merger performance. We provide evidence that SPAC mergers are relatively more in demand during times of higher volatility and weaker sentiment in equity capital transactions. Moreover, higher stock market valuation, higher sector leader return, and a lower cost of debt increase the likelihood of a SPAC acquisition. Furthermore, we find that common shares from SPAC mergers perform worse than the overall market over a time horizon of several years. However, we find that SPAC warrant investors have persistently outperformed the market in our sample period. Lastly, we find that a high redemption ratio and longer time for a sponsor to identify a business combination predict lower post-merger returns.