Agency Problems In Special Purpose Acquisition Companies

Abstract

Special Purpose Acquisition Companies (SPACs) are publicly held shell companies with no operations, formed with the sole purpose of acquiring a single private company. With a sample of 342 SPAC mergers between July 2016 and February 2022, we find that the average 3-month buy-and-hold abnormal return (BHAR) is -16.7 percent, and only a quarter of SPAC’s produce positive returns. We attribute these results to agency problems such as conflicting interests between the participants and adverse selection problems for the target shareholders. By analyzing SPAC data with the state-ofthe- art tabular machine learning algorithm, XGBoost, we identify previously undiscussed features that can help investors predict the performance of SPACs and understand the conflicting interest. Our results may indicate that outside investors are unaware of the true determinants of SPAC performance. Furthermore, our evidence suggests that the SPAC structure leads to optimistic valuations of target companies and primarily benefits the parties that sell or redeem their shares before the merger. We suggest new regulations that align the interest of the parties involved in the SPAC transaction with the publicly traded target firm.