• No results found

Robustness checks for the relation between prestigious underwriters and SPAC performance

title. In the robustness checks, different cut off levels are used to check if this significantly changes results. Table 10 presents the results with different underwriter prestige levels. All specifications in the panels use the Fama & French 5 factor model, as used in panel C of tables 7 & 8. We can conclude that varying the cutoff point for the underwriter prestige does not hurt significance of the results. Panel B and C both still report alphas of considerable economic magnitude and statistical significance in columns one through three. We observe alphas ranging from 0.663% to 2.48% on the different timeframes and prestige cut off points in panel B and C. Note that, as in the main results, an alpha of 2.48% in a three-day window is of considerable economic magnitude.

Panel A seems to report contradicting results. Here, alphas for the prestigious SPACs are lower than the non-prestigious SPACs in two out of the three time windows. Furthermore, only one timeframe shows a significant alpha. This is the 5-day window, which actually is the only window in which the prestigious SPACs report a higher alpha than the non-prestigious SPACs. The economic magnitude of this difference is less evident than in the other specifications with 1.66% versus 1.18%.

Even though panel A seems to contradict the main results, I conclude that this is not the case. The lack of significance in the results may be the result of a very limited number of observations. The prestigious SPACs in Panel A only reports 33 observations, or just 11 firms, whereas with all the other cutoff points, the amount of prestigious SPACS is at least double that. Therefore, although Panel A may provide some nuance to the results, it is concluded that the results and conclusions with regards to the hypothesis are still valid.

Table 10 – Robustness checks with different cutoff points for underwriter prestige

This table presents the results of an analysis of the portfolio returns. Artificial portfolios were constructed using a dummy variable for a prestigious underwriter. The cutoff point varies in panel A through C.

Columns one through three report the results for SPACs with a prestigious underwriter. Columns 4 through 6 report the results for the SPACs without such an underwriter.

33 Prestigious Underwriters Non-Prestigious Underwriters

(1) (2) (3) (4) (5) (6)

Panel A –

Top 5 T+3 T+5 T+10 T+3 T+5 T+10

Alpha 0.0162 0.0166* 0.00677 0.0183* 0.0118* 0.00719*

(0.121) (0.092) (0.178) (0.055) (0.074) (0.074)

Market 0.0179* 0.00823 0.00503 -0.0170 -0.0125 -0.00820

(0.089) (0.178) (0.146) (0.315) (0.340) (0.299)

SMB -0.0242 -0.0198 -0.0120 0.0106 0.00815 0.00972**

(0.294) (0.339) (0.341) (0.346) (0.284) (0.025)

HML -0.00147 -0.00721 -0.00525 0.0185 0.0138 0.00606

(0.861) (0.481) (0.370) (0.423) (0.397) (0.525)

RMW 0.0350 0.0280 0.0138 0.000480 -0.00118 0.000645

(0.151) (0.225) (0.234) (0.979) (0.934) (0.941)

CMA -0.0570 -0.0473 -0.0136 -0.0381 -0.0256 -0.0109

(0.226) (0.178) (0.290) (0.252) (0.315) (0.524)

Observations 33 55 100 185 263 495

R-squared 0.278 0.157 0.072 0.069 0.049 0.020

(1) (2) (3) (4) (5) (6)

Panel B –

Top 25 T+3 T+5 T+10 T+3 T+5 T+10 Alpha 0.0248** 0.0183** 0.00822* 0.00582 0.00267 0.00405

(0.037) (0.020) (0.058) (0.263) (0.464) (0.291) Market -0.0168 -0.0123 -0.00817 9.46e-05 0.000138 -0.00178

(0.431) (0.447) (0.432) (0.987) (0.974) (0.607)

SMB 0.00117 -0.00102 0.000375 0.0163** 0.0124** 0.0126**

(0.937) (0.922) (0.951) (0.046) (0.039) (0.017)

HML 0.0277 0.0117 0.00892 -0.00566 -0.00482 -0.00530

(0.297) (0.466) (0.405) (0.287) (0.186) (0.148)

RMW -0.00339 0.00397 -0.000289 0.0252* 0.0220** 0.0127

(0.882) (0.770) (0.970) (0.069) (0.039) (0.105)

CMA -0.0688 -0.0438 -0.0231 -0.00344 -0.00192 0.00588

(0.154) (0.169) (0.210) (0.784) (0.837) (0.535)

Observations 106 154 287 112 164 308

R-squared 0.097 0.045 0.029 0.052 0.046 0.016

(1) (2) (3) (4) (5) (6)

Panel C –

Top 50 T+3 T+5 T+10 T+3 T+5 T+10 Alpha 0.0205** 0.0155** 0.00663* 0.00632 0.00291 0.00540

(0.040) (0.025) (0.088) (0.288) (0.483) (0.222) Market -0.0162 -0.0121 -0.00748 -0.000903 -0.000573 -0.00246

(0.420) (0.428) (0.434) (0.889) (0.907) (0.530)

SMB 0.00278 0.000858 0.000444 0.0169* 0.0126* 0.0155**

(0.842) (0.927) (0.930) (0.055) (0.054) (0.015)

HML 0.0254 0.0110 0.00814 -0.00627 -0.00519 -0.00573

(0.309) (0.463) (0.411) (0.267) (0.173) (0.148)

RMW -0.00384 0.00141 -0.00120 0.0285* 0.0249** 0.0142*

(0.857) (0.909) (0.867) (0.056) (0.031) (0.093)

CMA -0.0618 -0.0388 -0.0206 -0.00302 -0.00141 0.00749

(0.169) (0.173) (0.217) (0.842) (0.898) (0.521)

Observations 121 178 330 97 140 265

R-squared 0.089 0.043 0.026 0.054 0.048 0.019

*** p<0.01, ** p<0.05, * p<0.1

34 8 Conclusion

Special Purpose Acquisition Companies (SPACs) do not have great reputation. Financial literature shows that SPACs generally underperform the market more than their IPO counterparts.

Furthermore, concerns about dilution and perverse incentives the capital structure brings further worsen the reputation. Therefore, the rise in popularity of these investment vehicles over the last few years is remarkable to say the least. This paper tries to shed light on the variables that might contribute to this rise in popularity.

Previous empirical literature shows a positive and significant relation between volatility and the likelihood a firm chooses a merger with a SPAC over the traditional IPO to go public. By using a logistic regression model with several control variables, surprisingly, I can conclude that the VIX index as proxy for volatility seems to lose its significant effect when including the years 2016-2020.

Where robustness checks point out that in the sample period 2003-2015, we observe a positive and significant relation between the VIX index and the likelihood of a SPAC merger. When the last years of the full sample set are included this significance fades. With regards to the market valuations, it is observed that market valuations are positively and statistically related to the possibility that a firm chooses a merger with a SPAC.

One variable seems to be fundamentally different in the sample set 2016-2020 as compared to the 2003-2015 period. The investment banks that acted as underwriter in SPAC offerings in the last years seem to be considerably bigger than before. The fact that more reputable investment banks are now involved in SPACs could be perceived by the market as a vote of confidence.

Academic literature suggest that the prestigious underwriters care about their reputation as it is directly tied to their future profits. Therefore, the literature suggest that prestigious underwriters carefully pick the firms they get into business with and that these firms tend to outperform IPO firms that do not have a prestigious underwriter. Therefore, the hypothesis is that SPACs that include a prestigious underwriter in their IPO outperform their counterparts that do not have such an underwriter.

In this paper, the SPACs were divided into two groups using a dummy variable for

underwriter prestige. One group consists of SPACs with a prestigious underwriter in their IPO, the other group consists of SPACs that do not have such an underwriter. The performance was analyzed using three asset pricing models. Alphas for the prestigious group range from 0.844% to 2.36% in three different short term time windows. These alphas are all statistically significant. For the non-prestigious SPACs, no such effect is found. First, the alphas for this group of SPACs are considerably lower, second only one out of nine alphas is statistically significant. Note that the alpha for the prestigious group of 2.36% is of considerable economic magnitude since this is the alpha in a 3-day

35 window after the announcement date of a SPAC acquisition. In the longer term, ranging from a 30-day window to a 180-30-day window, the outperformance of the prestigious groups dissipates. In the 180-day window both groups converge to a negative alpha of about 0.31%. These results are in line with the literature on both SPACs and the underwriter reputational effect and provide evidence in favor of the expectations.

Limitations to the conclusions of this thesis are twofold. The first concern is with the availability of the data. Data needed to be collected from several data sources and needed to be matched, sometimes by hand. Furthermore, the academical data sources do not seem to have identical lists with SPACs that completed an acquisition. The lists are highly similar but seem to not include all the SPACs. In other words, this might mean certain SPAC firms have unknowingly been omitted from the sample set. Although this won’t concern many firms and will likely not harm the results, it is good to be aware of this. A second limitation of this thesis is that this paper used asset pricing models to analyze the performance of SPACs. A regression model that tests for the variables causing a positive CAR would be a big challenge for an asset class that has not been investigated to a wide extent yet. Hence, the choice for asset pricing models. Although asset pricing models work for individual securities, they work best on portfolio returns.

Although the above-mentioned limitations should be taken into account, the conclusions with regards to the outperformance of SPACs backed by a prestigious underwriter was expected and will likely be of interest for investors. Therefore, an investment strategy that buys SPACs with a prestigious underwriter in the IPO and sells within 3 to 10 days after the merger announcement should create value for its investors. Future research could repeat the analysis conducted by this thesis in a later stage. Because of the wave of SPAC IPOs in 2020 and in 2021, there are still a lot of SPACs actively looking for a target. Therefore, it will be interesting to see if the conclusions of this paper still hold when all these SPACs completed their acquisitions. A replication of this paper in a later stage could add to our understanding of both SPACs and the underwriter reputation as signaling tool. Furthermore, future research can also focus on the same topic, but with a different research design to further solidify the findings.

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