The Structural Features and Performance of Special-Purpose Acquisition Companies

Abstract

Special-purpose acquisition companies (SPACs) are publicly held investment funds with no operations of their own but a pool of capital that is set up to acquire or merge with an operating business. Using a sample of 115 U.S. listed SPACs, that completed IPOs between January 2007 and December 2012, we find that the stock market performance of SPACs is extremely poor. Median 12 month BHAR return is -66.71 percent, and only exceptionally do SPACs produce positive returns. We attribute this result to shareholder dilution, enormously unbalanced sponsor incentives and intense competition from actors such as banks and private equity firms. While we find few significant factors that can help investors predict the return performance of SPACs, we find several factors that affect investor behavior. This may be an indication that outside investors misjudge what the true determinants of SPAC performance are. From the perspective of firms that are acquired by SPACs we find that the cash contributions by SPACs are small and that, in many cases, SPAC-mergers effectively increase the debt of the target company without providing any additional cash. Furthermore, our evidence suggests that SPAC-mergers are significantly overpriced, and that taking firms public in this way therefore primarily benefits the selling shareholders of the target firm.