The Information Conveyed in a SPAC's Offering.

Gil Cohen,Mahmoud Qadan

doi:10.3390/e23091215

Abstract

The popularity of SPACs (Special Purpose Acquisition Companies) has grown dramatically in recent years as a substitute for the traditional IPO (Initial Public Offer). We modeled the average annual return for SPAC investors and found that this financial tool produced an annual return of 17.3%. We then constructed an information model that examined a SPAC′s excess returns during the 60 days after a potential merger or acquisition had been announced. We found that the announcement had a major impact on the SPAC’s share price over the 60 days, delivering on average 0.69% daily excess returns over the IPO portfolio and 31.6% cumulative excess returns for the entire period. Relative to IPOs, the cumulative excess returns of SPACs rose dramatically in the next few days after the potential merger or acquisition announcement until the 26th day. They then declined but rose again until the 48th day after the announcement. Finally, the SPAC’s structure reduced the investors’ risk. Thus, if investors buy a SPAC stock immediately after a potential merger or acquisition has been announced and hold it for 48 days, they can reap substantial short-term returns.

Highlights

The SPAC (Special Purpose Acquisition Company) is a relatively new financing tool initiated at the beginning of 2016
SPACs are companies that go public with the sole purpose of acquiring or merging with a private firm by using the money that was previously raised through an initial public offering (IPO)
If price abnormality exists after the SPAC’s business combination announcement and if it fades over time, we expect that the cumulative abnormal returns of SPACs relative to those of the IPO Exchange Trade Fund (ETF) would rise in the days after the announcement and decline over time

Summary

Introduction

The SPAC (Special Purpose Acquisition Company) is a relatively new financing tool initiated at the beginning of 2016. A SPAC’s announcement of a potential business combination differs from traditional IPO fundraising procedures in the sense that the SPAC investors must confirm the suggested future merger. That is the first information conveyed to the financial markets by the SPAC initiators i.e., identifying potential sectors and activities that may create value to investors. The second time that information was conveyed by the SPAC to the financial markets is the announcement that a potential merger partner has been found and an agreement has been signed. At this important stage, the market applaud the fact that the SPAC’s goals are going to be fulfilled. This extra volatility can be diversified away using many such assets

Literature Review

Analysis and Data

Conditional Entropy and the Chain Rule

Findings

Summary and Implications