SPACs and IPOs: Consequences on Short-term and Long-term performance
| Thesis title in Czech: | SPAC a IPO: Vliv na krátkodobé a dlouhodobé výsledky |
|---|---|
| Thesis title in English: | SPACs and IPOs: Consequences on Short-term and Long-term performance |
| Key words: | SPAC, IPO, neprofitabilní, výkonnost, negativní, příjem, ztráta, BHAR, CAR |
| English key words: | SPAC, IPO, unprofitable, performance, negative, income, loss, BHAR, CAR |
| Academic year of topic announcement: | 2021/2022 |
| Thesis type: | Bachelor's thesis |
| Thesis language: | angličtina |
| Department: | Institute of Economic Studies (23-IES) |
| Supervisor: | Mgr. Josef Kurka |
| Author: | hidden - assigned by the advisor |
| Date of registration: | 15.06.2022 |
| Date of assignment: | 30.08.2022 |
| Date and time of defence: | 13.06.2023 09:00 |
| Venue of defence: | Opletalova, O314, místnost. č. 314 |
| Date of electronic submission: | 03.05.2023 |
| Date of proceeded defence: | 13.06.2023 |
| Opponents: | PhDr. František Čech, Ph.D. |
| References |
| Cumming, D., Haß, L.H. & Schweizer, D., 2014. The fast track IPO – Success factors for taking firms public with SPACs. Journal of banking & finance, 47, pp.198-213.
Datar, V., Emm, E. & Ince, U., 2012. Going public through the back door: A comparative analysis of SPACs and IPOs. Banking and Finance Review, pp.17-36. Kolb, J. & Tykvová, T., 2016. Going public via special purpose acquisition companies: Frogs do not turn into princes. Journal of corporate finance (Amsterdam, Netherlands), 40, pp.80-96. Signori, A., 2018. Zero-revenue IPOs. International review of financial analysis, 57, pp.106-121. |
| Preliminary scope of work in English |
| Research question and motivation
The purpose of the study is to uncover the discrepancies in performance of stocks depending on whether a company enters the stock exchange by an Initial Public Offering (IPO) or is acquired by a Special Purpose Acquisition Company (SPAC). I will specifically concentrate on the difference between zero-income companies and the rest of the companies, as zero-income companies are faced with different incentives when entering the stock exchange. Information-based models predict that firms should go public only after a sufficient amount of information about them has accumulated among potential investors (Chemmanur & Fulghieri, 1999). Most of the empirical evidence is consistent with the above theoretical prediction, as a private firm's likelihood of going public becomes significant only after reaching certain critical size and productivity levels (Chemmanur, He, & Nandy, 2010; Pagano, Panetta, & Zingales, 1998). Yet, zero-income firms have succeeded in raising a great volume of capital. This thesis will therefore concentrate on entities with zero income. In light of the dramatically growing number of SPACs in recent years, acknowledging the weaknesses and strengths of entering the market via SPAC becomes an important and actual topic. Kolb and Tykvová (2016) compare the performance of companies after an IPO and after a SPAC merger. They conduct an event-time analysis, specifically they compare buy-and-hold abnormal returns (BHAR) adjusted for the market, size, book-to-market and for the industry. Moreover, they employ calendar-time portfolio analysis in form of a five-factor regression models. The results uncover that SPACs tend to appear more in volatile markets than IPOs, and their ex-post performance is inferior to IPOs. The researchers found that SPAC mergers are virtually independent of market timing, unlike IPOs whose performance depends heavily on market timing. Datar, et al, (2012) study fundamental, operational, and aftermarket characteristics of SPACs in comparison to IPOs. Firstly, key characteristics are compared using regressions, secondly, changes in operating performance over the course of the first year of their tenure as a public company are tracked. In both approaches, the stand-alone and industry adjusted results are compared. Thirdly, they compare post-merger and post-IPO stock returns over several holding periods in raw and market-adjusted form. They find that in the year of the merger, SPACs carry more debt, are smaller, invest less, and have lower growth opportunities than the firms that conduct a conventional IPO in the same year. The authors claim that using a SPAC to go public is associated with subpar performance. I will be building on these two papers and concentrate on the different consequences for zero-income entities. Additionally, I will use current data containing the COVID-19 pandemic period, which has been quite turbulent on the financial markets. The thesis will uncover the firm characteristics determining whether it will enter the market through an IPO or will be acquired by a SPAC. In addition, I will study the role of these characteristics in the ex post performance of IPOs and SPACs. Contribution My research will bring different and unique scope into the debate about performance of IPOs against SPACs, since I will concentrate on the differences between zero-income companies, e.g. companies that reported no net income prior of the entrance of a public market, and rest of the companies. The lower or zero-income companies could be of substantial interest to more risk-prone investors, as they provide excellent growth opportunities that are naturally accompanied by larger risk. I will further examine the variations in company characteristics that led to their entry through an IPO or SPAC. I will also consider how these characteristics affect post-IPO/SPAC performance over the short-run and long-run. As a result, the thesis offers new perspectives and benefits investors. Retail investors account for a substantial portion of the investor community, and stock market investing is today more accessible than it has ever been. Retail investors might not, however, place the same priority on reviewing the financial statements as mutual funds or other sorts of investors from a variety of spectra. To make the thesis a "leaflet" for inexperienced retail investors, I decided to focus on businesses with negative net income. Methodology The buy-and-hold abnormal return (BHAR) analysis, in which I regress the buy-and-hold abnormal returns onto other attributes of a stock, will be a crucial component of my study. In addition, I will adjust BHAR for the market, industry, size, and book-to-market value, etc. I will analyse the drivers of both short-term and long-term returns. While I will be working mostly with equities listed in the US, I might also include stocks listed in Europe to increase robustness. Survival analysis will be based on the Cox proportional hazard model, may be another crucial aspect of the study. The data will be collected manually from publicly available sources. Moreover, I will build a probit model predicting whether a company planning to go public employs a SPAC or goes through the traditional IPO process. The performance of the equities, both those that went through the conventional method and those that used SPAC, will then be my main focus. Additionally, ex-post performance will be examined, and I will draw my conclusions about whether the company's choice of stock exchange entrance has an impact on the ex-post performance. I will concentrate on the differences between zero-income entities and the rest, as I believe that it could be a crucial element of the risk-return analysis of IPOs and SPACs. Outline 1) Introduction 2) Literature review 3) Methodology 4) Results a. Short-term consequences b. Long-term consequences 5) Conclusion |