SPAC Post-Merger Performance in the New Regime - An Agency Perspective

Abstract

SPACs are shell companies without operations created to raise capital in an IPO and subsequently identify a non-listed operating company to merge with. As of the last three years (2019-2021), the SPAC has witnessed a significant surge in popularity on the back of several tailwinds, including regulatory legitimization efforts and the participation of blue-chip sponsors and investors. While its growth and popularity is unmistakable, previous academic research has consistently shown that, following the merger, SPACs severely underperform relative the market, industry, and comparable IPOs. These researchers argue that agency problems, as an inherent issue to the SPAC structure, is to blame. However, the present-day SPAC surge is largely unexplored by academia due to its recentness, and we are yet to be provided with contemporary papers investigating agency conflicts, and its effect on share price performance, in the new regime. The apparent shift in the public and professional perception of SPACs begs the question if the vehicle has managed to jettison its issues and changed its fundamental characteristics, as defined in the prior literature. Heeding that call and with a purpose of advancing existing SPAC research – this paper aspired to illuminate on the performance of SPACs and its relationship to agency conflicts in the new regime. In doing this, we collected a sample of 189 SPACs that went public and successfully completed a merger transaction between 2015-2021 on U.S. stock exchanges. To answer our research question, we employed an event study methodology to capture both short- and long-term returns in excess of the market, which were subsequently regressed against a set of explanatory- and control variables, which enabled us to shed light on both performance and performance determinants. We find that SPACs in the new regime do not perform better than those of previous generations, and that the underperformance is apparent already after three months, and further deteriorates as time progresses – posting similar or worse market-adjusted returns after three years than what has been documented by the previous literature. In contrast to earlier findings, we report no evidence of any agency conflicts between SPAC sponsors and investors. This paper’s contribution to the literature is two-fold. We validate the long-term underperformance of SPACs, as highlighted by previous researchers, but contrast its determinants.