Target Firms of SPACs – Are They Set up to Fail? An empirical study of firms’ features and their unconventional choice of merging with a SPAC

Abstract

We study the determinants of why target firms choose to merge with SPACs, despite severe underperformance for the common stocks. The SPAC asset class has experienced extraordinary growth in the latest years, suggesting that other determinants influence the choice for a firm to merge with a SPAC. We find that post-merger SPACs report a median initial overpricing, i.e., negative first day returns, of -0.82%, continuing this negative trend throughout the first year a public company with median returns for 1, 3, 6 and 12 months being -9.01%, -15.87%, -29.83% and -58.71%, Despite this, target firms rush to merge with SPACs. We found that these firms are of inferior quality, meaning characterized by smaller size, lower profitability, weaker liquidity, and lower debt. Keywords: Special Purpose Acquisition Company, SPAC, SPAC-Merger, Post-Merger SPAC, Underperformance, Public Listing Route Choice, Target Firm Characteristics