SPACs.

This article provides a comprehensive analysis of Special Purpose Acquisition Companies (SPACs), focusing on their economic structure, costs, and investor returns compared to traditional initial public offerings (IPOs). It finds that merging with a SPAC is significantly more expensive for operating companies than a traditional IPO, with median costs of 15.1% versus 3.2% of post-issue market capitalization, largely due to underwriting fees, sponsor promotes, and dilution from warrants. While SPAC IPO investors and sponsors have historically earned high average annualized returns (23.9% and over 100%, respectively) during the SPAC period (from IPO to merger or liquidation), public investors in the merged companies have experienced poor post-merger returns, with common shares underperforming the market by about 30% annually, though warrant holders have earned substantial positive returns. The study also highlights agency problems inherent in SPAC structures, the role of redemption rights in aligning incentives, and notes that recent market conditions and higher liquidation rates suggest future SPAC investor and sponsor returns will likely be lower.