Return of the SPAC

Abstract

Past empirical research on Special Purpose Acquisition Companies has demonstrated long-term negative returns following the merger due to the flawed structure, mainly attributed to incomplete information. This paper examines the return of SPACs in the short-term surrounding two events: target deal announcement and merger completion. Furthermore, we study the effect of SPAC target industry, trust size, event timing, and institutional ownership extent, on the return at the events. Using a sample of 113 US SPACs during 2015–2020 we find abnormal returns surrounding the two events, discussed as market anomalies and in contrast to research on efficient markets. An opportunistic investor can use these anomalies to buy SPACs prior to the deal announcement and sell or even short the SPAC prior to the merger. Building on the research on the long-term returns of SPACs, this study finds support that also the short-term returns are affected by the structure of SPACs. This paper sheds new light on the upturn in SPAC activity, their performance, and their long-term implications.