Special Purpose Acquisition Companies deal announcement market reaction and performance : Empirical evidence from the U.S. SPACs during 2020 - 2021

Abstract

The special purpose acquisition company (SPAC) boom has been highly active since the beginning of 2020. Yet, SPACs are studied quite narrowly. The study aimed to examine how the market reacts when SPAC makes the deal announcement and to find out possible abnormal returns during the event. The study was performed for 40 SPACs. Abnormal returns were calculated for the event study, +/-3 days from the deal announcement. Also, abnormal returns were calculated for 1 week -, 2 weeks -, and one month from the announcement. The returns were risk-adjusted by the S&P500 index for the same periods for each SPAC. K-means clustering was executed for the SPACs by using min, max, and mean returns as explanatory variables and abnormal returns as target variables. The observation periods for the clusterings were a deal announcement day, 1-week -, 2 weeks -, and 1-month -post-announcement days. The results indicate that most of the SPAC companies had similar behavior between the observation periods and different explanatory variables. Yet, there were no similarities inside the clusters, and the two dummy variables, deal value, and SPAC’s target company industry could not either explain the abnormal returns during the observation periods. The study included two hypotheses: H1 assumed that SPACs do not generate abnormal returns on the day after the announcement date. H2 instead assumed that SPACs generate abnormal returns on the announcement date. Based on the results, H1 and H2 both were accepted. Also, it should be noted that the amount of available data for this thesis is quite narrow due to timeliness and data limitations. As a further research proposal, the number of samples should be raised, and the observation period should be increased after the data is available in order to create more significant results.