Purpose Acquisition Companies Research Articles

Going Dutch? Comparing Regulatory and Contracting Policy Paradigms via Amsterdam and London SPAC Experiences

AbstractThe special purpose acquisition company (SPAC) is a cash shell listed with the sole purpose of acquiring an operating business. Although SPACs, in a high interest rate environment, may have recently fallen out of favor, it was not long ago when they dominated the US markets. SPACs did not, though, come without controversy. Arguably, the incentives ingrained in typical SPACs make them poor investments for long-term shareholders, while lucrative for their sponsors and shareholders seeking to exit prior to an acquisition. Europe was not immune to the SPAC craze, but London and Amsterdam took differing approaches. While London employs a regulatory paradigm pursuant to which SPACs (to avoid a trading suspension upon announcement of an acquisition) must adopt specific terms, Amsterdam follows a contracting paradigm, giving market participants broad scope to implement any SPAC terms that they see fit. In this article, the terms of the cohort of London- and Amsterdam-listed SPACs from 2021 and 2022 are comprehensively scrutinized in the context of the terms that are embedded in the typical US SPAC. This article finds that many of the terms mandated by London’s regulatory rules are also found in Amsterdam-listed SPACs. However, many of those London- and Amsterdam-listed SPACs also display many of the qualities seen in the US which have caused so much consternation. Taking inspiration from the phrase ‘going Dutch’, it is argued that an optimal SPAC policy that assuages concerns levied at US SPACs should take contributions from both the regulatory and contracting paradigms.

From the Voc to the Spac: At the Root of the Corporation’s Soul

This article aims to provide a thorough analysis of the evolution of the company, starting from the inception of the first public company in the seventeenth century, namely the United East India Company (VOC), until the modern expression of a novel form of cash-shell company that in recent years has taken Wall Street by storm: the Special Purpose Acquisition Company (SPAC). As opposed to common wisdom that would like to compare the SPAC to England’s South Sea Bubble of 1720, the paper argues that both the VOC and the SPAC have remarkable similarities by virtue of sharing one of the most important corporate features: ‘venturing beyond’ for special purposes, and being the instruments through which the dreams of entrepreneurs can be realised.

SPACs and the COVID-19 pandemic: Evidence from Korea

We examine how the COVID-19 pandemic affected the mergers of special purpose acquisition companies (SPACs) in Korea, where SPACs—since their introduction in 2010—have played a significant role in private company public listings. After the COVID-19 outbreak, SPACs were less likely to merge, but for those which chose to do so, merger announcement returns were on average higher, particularly for those that waited to merge until after the stock market recovered its pre-pandemic value. We also find evidence that SPAC holding period returns from the SPAC’s initial public offering to merger consummation (or liquidation, in the case of SPACs that failed to complete a merger) were on average higher after the outbreak. Overall, our results suggest that, despite their limited lifespan and agency issues, SPACs may operate more efficiently and perform better during periods of economic downturn.

A Study on the Potential Introduction of Special Purpose Acquisition Companies into Taiwan

A Study on the Potential Introduction of Special Purpose Acquisition Companies into Taiwan

Cross-border acquisitions: The case of SPACs

We examine one aspect of special purpose acquisition companies (SPACs) in the U.S. market, namely their focus on foreign targets. Using a sample of 1737 SPAC IPO filings and 537 SPAC mergers with targets from 28 countries between 2003 and 2022, we study both the geographic preference revealed in SPACs' IPO filings and the geographic location of target firms in the subsequent acquisitions. Our results show that 69% of SPACs with a declared foreign focus are subsequently successful in acquiring a foreign target. However, they take longer time to identify and complete mergers compared to those with a domestic focus. When a merger is announced, SPACs with U.S. targets exhibit significantly higher announcement returns compared to those with foreign targets, with an even more pronounced difference when targets are from China or other emerging markets. Post merger, all SPACs exhibit poor market-adjusted returns. SPACs with Chinese targets suffer the worst one-year post-merger stock performance, whereas those with targets from other emerging markets perform considerably better than the rest of their peers. Further examination suggests that country-level factors, such as investor protection and accounting standards, are significant determinants in post-merger market performance of SPACs engaged in cross-border acquisitions.

Innovating corporate share listing frameworks: a comparative study of SPAC regulatory regimes in the United Kingdom, Singapore, and Hong Kong

ABSTRACT In the 2020s, special purpose acquisition companies (SPACs) have swiftly emerged as an alternative vehicle for global corporations that seek a public listing. This article aims to critically analyse the regulatory frameworks governing SPAC listings in three prominent common law jurisdictions: the United Kingdom, Singapore, and Hong Kong. It evaluates the latest corporate share listing reforms from a comparative perspective, shedding light on how each jurisdiction adapts to the dynamic nature of SPACs and addresses rising challenges regarding investor protection under their new listing regimes. The discussion focuses on the influence of international best practices and the cooperation among global regulatory authorities. By providing an in-depth comparative analysis of SPAC listing rules in London, Singapore, and Hong Kong, this article offers valuable insights for researchers, legal practitioners, policymakers, public companies, and their investors who seek to understand the regulatory landscape for SPACs and innovative corporate regimes in leading financial centres. The findings enhance our understanding of the strengths and weaknesses of the SPAC regulatory frameworks in each of the three jurisdictions, thus assisting stakeholders in making informed decisions in the rapidly evolving global financial landscape.

Fraud risk implications of celebrity SPACs

Purpose The purpose of this study is to extend the Fraud Diamond Theory to celebrity Special Purpose Acquisition Companies (SPACs) and investigate their post-Initial Public Offering (IPO) stock market performance. Design/methodology/approach After obtaining a sample of celebrity SPACs from the Spacresearch.com database, fraud risk characteristics were obtained from Lexis Nexus searches. Buy and hold abnormal returns were calculated for celebrity SPACs versus a small-cap equity benchmark for time intervals after IPO, and multiple regression analysis was performed to examine the relationship between fraud risk features and post-IPO returns. Findings Celebrity SPACs exhibit Fraud Diamond characteristics and significantly underperform a small-cap stock portfolio on a risk-adjusted basis after IPO. Research limitations/implications This study only examines celebrity SPACs that conducted IPOs on the NYSE and NASDAQ/AMEX and does not include those that are traded on the Over the Counter Bulletin Board (OTCBB). Practical implications Celebrity endorsement of SPAC vehicles attracts investors who may not be properly informed regarding the risk characteristics of SPACs. Accordingly, investors should be warned that celebrity SPACs underperform a small-cap equity portfolio and exhibit significant elements of fraud risk. Social implications The use of celebrity endorsement as a marketing device to attract investment in SPACs has regulatory implications. Originality/value To the best of the authors’ knowledge, this paper is the first to examine the fraud risk characteristics and post-IPO performance of celebrity SPACs.

The iSPAC

Special purpose acquisition companies (SPACs) are one of the most celebrated investment vehicles in recent years. Relative to traditional IPOs, SPACs are much more cash-strapped and speculative. Resultantly, the scope for SPACs remains sparse for certain segments of the financial system notwithstanding the SPAC euphoria surrounding the financial markets: one notable exception is Islamic banking and finance. The Islamic banking business model is based upon the ethical ontologies and epistemologies – informed by the divine sources of Quran and Sunnah: the Shariah – operating with the mandate to promote socio-economic justice through a fair redistribution of wealth while embargoing speculative trading or investments and adopting a risk-sharing model between economic agents. Unsurprisingly, – owing to the speculative nature of SPACs – the Islamic finance industry remains reluctant to participate in the SPAC-mania despite the frenzy engulfing global securities markets. This work addresses the misaligned incentives inherent in a conventional SPAC structure and proposes alternative SPAC structure terms i.e., the iSPAC, which potentially mitigates the noted misaligned incentives and offers less dilutive SPAC terms to shareholders. Specifically, iSPAC structure terms address the issues of speculation (gharar), information asymmetry, and transparency in the pre-IPO phase, which may lead to adverse selection and moral hazard. Equally, the proposed structure reconciles post-IPO operational and investment-related risks such as the treatment of proceeds, interest rate (riba), opportunity costs, and management costs in consort with unethical behavior i.e. cashing-out opportunities that may lead to uneven redistribution of wealth thereby, widening the socio-economic voids in the society.

The information content of SPAC securities

Special Purpose Acquisition Companies (SPACs) have taken the initial public offering (IPO) market by storm. SPACs were 2/3 of all IPOs in 2021 and have continued to be a significant portion of IPOs since. A unique feature of SPACs is that the SPAC shares trade for weeks/months after a target has been announced, but before the proposed deal is consummated, giving a window into the market's sentiment towards the deal terms. Although Shareholders' redemption option reduces the informativeness of SPAC shares, SPAC rights (& warrants) provide a window into the eventual pricing of SPAC shares post de-SPAC because they aren't redeemable. We explore the informativeness of the portfolio of SPAC securities and find new insight into the pricing of these transactions. Prices of rights and warrants are far more informative about the value of a proposed business combination than share prices, and warrant prices are predictive of future redemptions.

Communication under Uncertainty and the Role of Founders’ Information Advantage: Evidence from SPAC IPOs

This study develops a novel framework about how a firm’s financing outcome will be shaped by its communication under different types of uncertainty. Whereas prior work has largely focused on uncertainties that arise because of founders having a knowledge advantage over investors, we examine a firm’s communication in situations of more fundamental uncertainty when both founders and investors face knowledge problems. Our framework proposes that in situations where founders have a knowledge advantage over investors (i.e., when there is information asymmetry), firms that reduce uncertainty by sending signals of quality and express less uncertainty in their communications will enjoy better financing outcomes. However, we argue that in situations characterized by high unknowability, and where founders do not have a significant knowledge advantage over investors (i.e., when there is Knightian uncertainty), firms that acknowledge this unknowability by expressing more uncertainty in their communications will have more favorable financing outcomes. Studying the full population of special purpose acquisition companies (SPACs) that sought to complete an initial public offering from the emergence of the sector in 2003–2019, we find support for our predictions. This study expands our understanding of the role of uncertainty in investment decisions, offers deeper insight into how language operates in financial markets, and sheds light on the increasingly popular, but understudied, SPAC vehicle. Funding: Ivana Naumovska received financial support from the INSEAD R&D Committee and the INSEAD Dean’s Annual Fund. Supplemental Material: The online appendix is available at https://doi.org/10.1287/stsc.2022.0043 .

Signing Blank Checks: The Roles of Disclosure and Reputation in the Face of Limited Information

ABSTRACT We examine how disclosure and manager reputation influence capital raised when there is no commercial substance underlying the investment. Special Purpose Acquisition Companies (SPACs or “blank check” companies) do not have operations or substantive assets at the IPO but promise to use the funds raised to acquire a private firm, generally within two years. Given the lack of commercial substance and historically poor ex post performance, it is unclear what SPACs disclose at the IPO and why investors invest. Although disclosure is important in traditional IPOs, the underlying information available differs for SPACs. Nonetheless, our evidence suggests disclosures are useful to SPAC investors, although differently than for traditional IPO investors. We also examine manager reputation and find prior SPAC or CEO experience and celebrity status are associated with funds raised. Even when an investment lacks commercial substance, disclosure and reputation are important for investing decisions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G24; G34; M41; M50.

Market sentiment and SPACs

ABSTRACT This study investigates how market sentiment affects Special Purpose Acquisition Companies (SPACs). SPACs are blank-check, no-operation companies, which go public and raise money with the intention of acquiring and taking a private company public. Using hand-collected SPAC data, we find that SPAC activities grow significantly in volume and size, especially during the pandemic period of 2020–2021. Based on two market sentiment indexes, the investor sentiment (IS) and consumer confidence index (CCI), we find that SPAC activities are positively associated with market sentiment. The results remain strong and consistent even after controlling for macroeconomic conditions. Overall, we attribute our findings to investors’ willingness to invest in more speculative securities during times of high market sentiment.

Special Purpose Acquisition Companies

Special Purpose Acquisition Companies

Decoding the Special Purpose Acquisition Companies: A New Frontier in Tech Start-Up Financing

The emergence of SPAC has democratized participation in the burgeoning equity market. Capital raised during a SPAC's Initial Public Offering (IPO) is typically held in escrow identifies a suitable acquisition or merger target. This study explores the concept of SPACs, their operational mechanisms, their appeal to tech startups, and their presence in Asia, with a specific focus on the Indonesian jurisdiction. The study also aims to identify the potential risks SPACs may pose to the equity market to inform more effective regulation. Employing normative legal research and prioritizing secondary data, the findings of this paper indicate that SPACs have evolved from a niche option to a significant facilitator for private enterprises seeking to enter public markets through an IPO. The study further reveals that, despite the risks associated with SPACs and their current unpreparedness for IPOs in Indonesia, lessons from foreign experiences could guide the development and implementation of domestic regulations. While SPACs have demonstrated their value and promise to become a significant market force, calls for swift regulatory action should balance the benefits of SPACs against the need for thoughtful regulation, presenting an opportunity to reconsider existing IPO regulations.

Sponsor reputation and agency conflicts in SPACs

We investigate the agency conflict between sponsors and investors in Special Purpose Acquisition Companies (SPACs) and the role of sponsor reputation in such conflict. We find that the effect of reputation depends on whether sponsors are repeat or occasional players in financial markets. SPACs sponsored by private equity firms, who face reputational concerns due to frequent interactions with investors, conduct a more virtuous target selection process as they are less likely to merge but post-merger returns are significantly better. On the other hand, former executives of renowned companies who occasionally launch SPACs make deals more lucrative to themselves, with no benefits to investors.

Blinded by the Light? Analyzing Celebrity Endorsements in Special Purpose Acquisition Companies

Blinded by the Light? Analyzing Celebrity Endorsements in Special Purpose Acquisition Companies

Are SPAC Revenue Forecasts Informative?

ABSTRACT This paper examines the informativeness of special purpose acquisition company (SPAC) revenue forecasts. We document a positive association between the compound annual growth rate in revenue forecasts and abnormal returns, retail trading, and Twitter activity in the five-day window surrounding the disclosure of a merger announcement. By contrast, we find limited evidence that institutional investors and traditional information intermediaries respond to SPAC revenue forecasts. We also find evidence that SPAC revenue forecasts positively predict future operating underperformance, stock underperformance, and class action lawsuits. Overall, our results affirm the SEC’s concerns about the attractiveness of aggressive revenue projections to retail investors. JEL Classifications: G34; G32; M40; M48.

Performance of ESG SPACs

PurposeThe authors examine one special focus of Special Purpose Acquisition Companies (SPACs), namely environmental, social and governance (ESG) related investments. The authors document the performance of SPACs with and without ESG focus.Design/methodology/approachThe authors collect data, from several sources, on 1,737 SPAC IPOs formed between 2003 and 2022. A SPAC's focus on ESG is classified based on declared focus in Securities and Exchange Commission (SEC) filings and in post-merger annual reports. The authors examine operational and financial performance of SPACs with and without ESG focus.FindingsIn the study's sample, only 50% of SPACs that announced an intention to acquire an ESG target ended up consummating a merger with an ESG private firm. ESG SPACs exhibit worse operating performance than non-ESG SPACs. Furthermore, they experience 11.6% lower 1-year post-merger excess returns than their non-ESG counterparts.Originality/valueThe study provides an examination of ESG firms that came to market via mergers with SPACs, which is an alternative method to traditional initial public offerings (IPOs). The study also provides a comparison of both operational and stock performance of ESG and non-ESG SPACs.

Green SPACs

AbstractWe examine the structural characteristics of special purpose acquisition companies (SPACs) focused on green causes. We explain their ecosystem, primary determinants of initial public offering (IPO) size, and speed of going public, and we calculate their returns around merger announcements and subsequent acquisition. Green SPAC size depends on CEO characteristics, choice of exchange and specialisation of respective stakeholders. The speed to IPO is related to the respective concentration of legal counsel. Green SPACs exhibit cumulative market‐adjusted returns in the range 6%–12% around the merger announcement. Merger returns are positive at the merger date but quickly become negative (−1% to −9%) and decline further with time.

IPOs and SPACs: Recent Developments

After two decades of low initial public offering (IPO) activity and a number of regulatory changes, the number of IPOs of both operating companies and special purpose acquisition companies (SPACs) boomed in the United States in 2021 before collapsing in 2022. In recent years, surging valuations have resulted in many private companies achieving “unicorn” status, a valuation of $1 billion or more, partly fueled by investments from mutual funds. Many of the unicorns that have gone public have done so with dual-class share structures. We compare three alternative mechanisms for going public, including traditional IPOs, mergers with SPACs, and direct listings. The most common exit for successful venture capital–backed companies, however, continues to be by merging with a larger company.