Finance Series
Clauses with Claws: Reducing Agency Costs in Late-Merging SPACs
Working Paper Author/Authors
Diego Leal
University of Texas at El Paso
Fang Lin
Pacific Lutheran University
California State University, San Bernardino & ECGI
Fordham University
University of Oklahoma
University of Oklahoma
Key Finding
Late SPAC Mergers have lower returns, but Contingency Clauses mitigate Agency Costs
Abstract
We investigate the timing of SPAC mergers and subsequent deSPAC performance. Inspired by a simple target acquisition model, we employ duration analysis and find that SPACs often merge late, which is suggestive of high agency costs near the SPAC liquidation deadline. Contingency clauses can mitigate these costs by aligning manager and shareholder interests. Late merging SPACs without such clauses underperform, with 7-9% lower merger announcement returns and 30% lower deSPAC ROA. Notably, SPAC contingency clauses are only performative when agency costs are high, underscoring their importance in improving the performance of late-merging deSPACs.
