Flipping the Coin: Are Spacs Post-Merger Value-Creating or Value-Destroying? An Empirical Study on the Value Effects of Special Purpose Acquisition Companies in the United States

Abstract

This study examines the merger announcement and post-announcement value effects of special purpose acquisition company (“SPAC”) transactions in the United States from January 2010 up to March 2021. It finds positive cumulative abnormal merger announcement returns (“CARs”) and negative long-term buy-and-hold abnormal returns (“BHARs”) post-announcement - consistent with previous research. The short-term effect is considerably larger (10.50%) for post-COVID SPACs, with faster deals, fewer redemptions, and more frequent PIPE involvement during bull markets with high market volatility and a low cost of debt. The BHARs are on average positive up until 15 months after merger announcement and negative afterwards. This study shows the effect of long-term performance is influenced by several SPAC characteristics. Firstly, the post-merger performance is better for SPACs with management with C-suite operational experience. Surprisingly though, prior experience of managers with SPAC transactions is not indicative of future results, as serial sponsors consistently underperform first-time sponsors. Secondly, SPAC deals with a higher proportion of PIPE financing show superior long-term performance, due to external deal validation leading to fewer redemptions. This study contributes to the limited existing literature on the post-merger effects of SPACs, by introducing new explanatory variables, performing multivariate regressions, and incorporating post-COVID SPAC mergers, leading to larger sample sizes. Given recent SPAC popularity, my findings have important implications for U.S. public market investors, corporate finance advisors, regulators and early-stage companies considering merging with a SPAC.