Going public through the back door: A comparative analysis of SPACs and IPOs

We study the fundamental, operational, and aftermarket characteristics of special purpose acquisition companies (SPACs) created in the U.S. during the years 2003-2008. We compare the characteristics of the 156 firms that chose to merge with SPACs to become a public company with the 794 firms that chose the traditional initial public offering (IPO) route. In addition, we analyze the changes in SPAC and IPO firms’ operational performance and stock market returns in the year following the floatation of new shares. This is the first study that focuses on the long-term financial and operational performance of SPAC firms. Operational performance of SPAC firms is significantly inferior to their industry peers and to contemporaneous IPO firms. SPAC firms carry more debt, are smaller, invest less, and have lower growth opportunities than the firms that conduct a conventional IPO. While excess stock returns for both IPO and SPAC firms are negative, they are substantially more negative for SPAC firms. In light of the substantially negative investment performance of SPACs that is uncovered in this study, investors should be wary of participating in SPAC transactions.