Emerging Trends in the Special Purpose Acquisition Company Market: Implications of Front-End IPO Underpricing

Abstract

Special purpose acquisition companies (SPACs) are a form of investment vehicle that has seen a significant degree of capital inflow over the last few years. In an effort to understand the trends driving inflows, I examined first-day returns associated with different portions of the market and compared those first-day returns with returns associated with traditional initial public offerings (IPOs). After conducting an event study test, I found that SPAC IPOs are on average underpriced to a more significant degree than traditional IPOs. I suggest that this dynamic occurs since investors have less information available to factor into the price discovery process, leading to greater uncertainty in the value of the investment. I additionally found that larger SPAC IPOs experience a greater degree of underpricing than smaller SPAC IPOs. I propose that this occurs as a function of the investor base with which SPAC tends to be associated with. SPACs looking to raise greater sums of money look to raise money from larger institutional investors, who have a greater ability to negotiate more favorable investment terms.