Clauses with Claws: Reducing Agency Costs in Late-Merging SPACs

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.

Keywords: Special Purpose Acquisition Company, SPAC, Duration Analysis, Hazard Function, deSPAC Performance