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Article
Publication date: 12 June 2017

Milos Vulanovic

The purpose of this paper is to study how institutional characteristics of specified purpose acquisition companies (SPACs) are related to their post-merger survival. SPACs

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Abstract

Purpose

The purpose of this paper is to study how institutional characteristics of specified purpose acquisition companies (SPACs) are related to their post-merger survival. SPACs are unique financial firms that conduct the initial public offering (IPO) with the sole purpose of using the proceeds to acquire another private company. The paper finds that institutional characteristics of SPACs are important in determining post-merger outcomes of new company, specifically when it comes to their survival/failure, i.e., increases in pre-merger commitment by SPAC stakeholders and initial positive market performance increase post-merger survival likelihood; on the contrary, mergers with higher transaction costs and focused on foreign companies exhibit increased likelihood of failure.

Design/methodology/approach

Using unique sample of companies conducting an IPO, namely, SPACs, with the sole purpose to execute an acquisition in the future date within limited time, this paper presents additional evidence on the survival and acquisition frequency of IPOs, and determinants of these choices.

Findings

Observing unique set of specified purpose companies, this paper documents that SPACs’ failure rate is at the level of 58.09 percent, higher than any previously reported failure rate in the post-IPO survival literature and comparable only to failure rates found by Hensler et al. (1997) at 55.10 percent for general companies. In addition, the paper documents similar findings to Bhabra and Pettway (2003) that prospectus and market characteristics of original companies have predictive power with respect to survival.

Originality/value

This study extends the literature on post-IPO survival in following ways. First, the paper documents survival rates for unique set of companies organized with the sole purpose to acquire another company. Second, the paper presents evidence on how institutional characteristics of SPAC determine their post-merged outcomes, specifically when it comes to their failures. Finally, paper contributes to the scant literature on SPACs providing new evidence on their post-merger outcomes and performance.

Details

Managerial Finance, vol. 43 no. 6
Type: Research Article
ISSN: 0307-4358

Keywords

Book part
Publication date: 27 June 2017

Kamal Ghosh Ray and Sangita Ghosh Ray

Special purpose acquisition companies (SPACs) are created by a group of specialists to pool funds for financing future acquisitions within a specified time limit. SPACs

Abstract

Special purpose acquisition companies (SPACs) are created by a group of specialists to pool funds for financing future acquisitions within a specified time limit. SPACs are basically “shell” companies with no operations and business, assets or liabilities but they acquire the status of public corporations through initial public offerings (IPOs). The SPAC founders use the IPO funds to acquire a potential target. They are generally found to be successful to close an mergers & acquisitions (M&A) deal but they may not bother to ensure perpetual success of the acquired entity for a long time. In many countries, “shell” companies are characterized as the “bad boys” of the corporate world but they can be used for long-lasting successful M&As due to their inherent strengths, if they play the role of protagonists and “good guys” as SPACs. This chapter examines how SPACs can be used as special vehicles to ensure worthy and successful acquisitions to create sustainable corporations.

Book part
Publication date: 6 November 2012

John S. Howe and Scott W. O’Brien

Purpose – We examine how the ownership and corporate governance of special purpose acquisition companies (SPACs) influence their short- and long-run performance.

Abstract

Purpose – We examine how the ownership and corporate governance of special purpose acquisition companies (SPACs) influence their short- and long-run performance.

Design/methodology/approach – By splitting our sample at the median value of different governance characteristics, we test for differences in short- and long-run performance between the low and high governance groups.

Findings – We find weak evidence of a positive influence of board independence on performance, but no indication that either managerial or institutional ownership is associated with performance.

Research limitations/implications – The study provides further evidence on the open question of how governance characteristics affect firm performance.

Originality/value – We describe the unique conflicts that exist within a SPAC, and the recent evolution of their organizational structure in response to these conflicts.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78052-788-8

Keywords

Article
Publication date: 8 March 2013

Milan Lakicevic and Milos Vulanovic

This paper aims to study characteristics of specified purpose acquisition companies (SPACs) and examine the performance of their securities over time.

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Abstract

Purpose

This paper aims to study characteristics of specified purpose acquisition companies (SPACs) and examine the performance of their securities over time.

Design/methodology/approach

Previous findings in literature on SPACs' performance around the announcement of merger date are scarce, not uniform, and mostly address the performance of SPACs' common shares. The authors believe that more insights on merger announcements can be obtained if the perf]ormance of all three types of securities that SPACs issue during the IPO, namely units, common stocks, and warrants are analyzed simultaneously. In order to examine the behavior of these securities we form three samples with daily returns for three distinguished SPAC securities. Results are obtained for abnormal returns based on the market model from Brown and Warner.

Findings

It is found that SPACs represent a fairly unique way to raise capital. The incentives of their founders, underwriters, and investors are interdependent and successful business combinations generally result in significant returns to founders. The analysis shows that SPACs have a complex corporate structure in which the incentives of the founders, underwriters, and investors are interdependent and where successful mergers result in significant returns to the founders. It also shows that different SPAC securities do not exhibit similar reactions in response to announcements regarding their corporate status. While holders of all three securities realize positive abnormal returns on the merger announcement day, the strongest reaction is observed among the investors holding warrants, while common stock holders react very mildly.

Originality/value

SPACs are recent phenomena in capital markets and very few papers in finance literature describe them. None of the existing papers evaluated performance of all three types of SPAC securities: units, common shares and warrants before this paper.

Details

Managerial Finance, vol. 39 no. 4
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 13 March 2009

Henry A. Davis

The purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) regulatory notices issued from September to November 2008.

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Abstract

Purpose

The purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) regulatory notices issued from September to November 2008.

Design/methodology/approach

The paper provides excerpts from FINRA Regulatory Notice 08‐54, Guidance on Special Purpose Acquisition Companies; Regulatory Notice 08‐62, Limit on Close Case Submissions; 08‐66, Retail Foreign Exchange; and 08‐70, FINRA Investigations.

Findings

Notice 08‐54: Special purpose acquisition companies (SPACs) are shell companies that raise capital in initial public offerings (IPOs) for the purpose of merging with or acquiring an operating company. Notice 08‐62: Effective November 24, 2008, FINRA will limit the circumstances under which parties may make submissions to arbitrators in closed cases. Notice 08‐66: The retail over‐the counter foreign currency exchange (retail forex) market is opaque, volatile and risky. Broker‐dealers who engage in forex business with their retail customers must comply with the FINRA rules that apply to those activities. Notice 08‐70: FINRA is issuing this guidance to apprise firms of the circumstances in which extraordinary cooperation by a firm or individual may directly influence the outcome of an investigation.

Originality/value

These are direct excerpts designed to provide a useful digest for the reader and an indication of regulatory trends. The FINRA staff is aware of this summary but has neither reviewed nor edited it. For further detail as well as other useful information, the reader should visit www.finra.org

Details

Journal of Investment Compliance, vol. 10 no. 1
Type: Research Article
ISSN: 1528-5812

Keywords

Book part
Publication date: 1 March 2021

Matthew W. Ragas and Ron Culp

Abstract

Details

Business Acumen for Strategic Communicators: A Primer
Type: Book
ISBN: 978-1-83867-662-9

Book part
Publication date: 30 November 2020

Kamal Ghosh Ray

A corporate takeover (with major stake in equity) gives the acquirer the right to appoint majority of directors in the target’s board to control its management and policy…

Abstract

A corporate takeover (with major stake in equity) gives the acquirer the right to appoint majority of directors in the target’s board to control its management and policy decisions. When such acquisition is unsolicited and unwelcome, it becomes a “hostile takeover.” In such cases, the acquirer is said to be a “raider” and the raider’s management team may act under the influence of “hubris” implying that they seek to acquire the target for their own personal motives ignoring pure economic gains for the owners of both the companies. The hostile bidder makes all possible efforts to justify the takeover by paying handsome premium over the target’s fairly valued share price. In a hostile takeover, the target management or target promoters resist and fight tooth and nail against the raider to convey to the world that the bidder’s acts are not in the best interest of all their stakeholders. Any unsolicited and hostile takeover offer is generally viewed as oppression, domination or coercion by the bidding company against the target and its management. In a hostile bid, the existing target management always believes that whatever they do is in best interest of everyone. They feel complacent and assume that their standards of corporate governance are of highest order. Therefore, they are unwilling to succumb to the aggression and hostility of another corporate entity for takeover. The “so-called” victimized target resorts to all means to gain sympathy from peers, press, common shareholders, employees and general public. In today’s regulated market for corporate control, an intelligent hostile bidder would probably not acquire a business unless it has good strategic or financial reasons to do so. Hence, “stewardship” on the part of bidder’s management is very important in case of any hostile takeover. This chapter derives motivation from a three-and-half-decade-old abortive hostile takeover bid in India by Caparo Group of the UK and also the recently completed hostile takeover in India of a famous mid-sized information technology company, Mindtree by Larsen & Toubro, a major conglomerate. This research aims at developing a distinctive model to demonstrate that unsolicited hostile takeover may not be a good mechanism for a successful business combination.

Article
Publication date: 3 December 2020

Nurwati A. Ahmad-Zaluki and Bazeet Olayemi Badru

This study aims to investigate the effects of the intended use of initial public offerings (IPO) proceeds that is disclosed in the prospectus on IPO initial returns.

Abstract

Purpose

This study aims to investigate the effects of the intended use of initial public offerings (IPO) proceeds that is disclosed in the prospectus on IPO initial returns.

Design/methodology/approach

A sample of IPOs listed on Bursa Malaysia from 2005 to 2015 is used. The intended use of IPO proceeds is categorised into three uses, namely, growth opportunities, debt repayment and working capital. In addition to ordinary least squares regression, the study applies a more sophisticated and robust approach using the quantile regression technique.

Findings

The results show that the intended use of IPO proceeds for growth opportunities and working capital is positively associated with IPO initial returns, whereas debt repayment is negatively associated with IPO initial returns. When the intended use of IPO proceeds for growth opportunities is further expanded into capital expenditure (CAPEX) and research and development (R&D), the intended use of IPO proceeds for CAPEX is positively associated with IPO initial returns, whereas R&D is negatively associated with IPO initial returns.

Research limitations/implications

These findings suggest that intended use of IPO proceeds provides useful information about IPO initial returns and investors can use this information as guidance to make informed decisions. In addition, regulatory authorities should pay close attention to the amount allocated to each intended use of IPO proceeds as this may play a critical role in the success of a company and the economy.

Originality/value

This study gives new empirical evidence on the desire and motivations of IPO and the usefulness of designated use of IPO proceeds disclosed in the prospectus in explaining IPO initial returns.

Details

Journal of Financial Reporting and Accounting, vol. 19 no. 2
Type: Research Article
ISSN: 1985-2517

Keywords

Open Access
Article
Publication date: 20 June 2022

Kimberly Gleason, Yezen H. Kannan and Christian Rauch

This paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and…

Abstract

Purpose

This paper aims to explain the fundraising and valuation processes of startups and discuss the conflicts of interest between entrepreneurs, venture capital (VC) firms and stakeholders in the context of startup corporate governance. Further, this paper uses the examples of WeWork and Zenefits to explain how a failure of stakeholders to demand an external audit from an independent accounting firm in early stages of funding led to an opportunity for fraud.

Design/methodology/approach

The methodology used is a literature review and analysis of startup valuation combined with the Fraud Triangle Theory. This paper also provides a discussion of WeWork and Zenefits, both highly visible examples of startup fraud, and explores an increased role for independent external auditors in fraud risk mitigation on behalf of stakeholders prior to an initial public offering (IPO).

Findings

This paper documents a number of fraud risks posed by the “fake it till you make it” ethos and investor behavior and pricing in the world of entrepreneurial finance and VC, which could be mitigated by a greater awareness of startup stakeholders of the value of an external audit performed by an independent accounting firm prior to an IPO.

Research limitations/implications

An implication of this paper is that regulators should consider greater oversight of the startup financing process and potentially take steps to facilitate greater independence of participants in the IPO process.

Practical implications

Given the potential conflicts of interest between VC firms, investment banks and startup founders, the investors at the time of an IPO may be exposed to the risk that the shares of the IPO firms are overvalued at offering.

Social implications

This study demonstrates how startup practices can be extended to the Fraud Triangle and issue a call to action for the accounting profession to take a greater role in protecting the public from startup fraud. This study then offers recommendations for regulators and standards entities.

Originality/value

There are few academic papers in the financial crime literature that link the valuation and culture of startup firms with fraud risk. This study provides a concise explanation of the process of valuation for startups and highlights the considerations for stakeholders in assessing fraud risk. In addition, this study documents an emerging role for auditors as stewards of proper valuation for pre-IPO firms.

Details

Journal of Financial Crime, vol. 29 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 19 February 2021

Jonathan J. Burson and Marlin R.H. Jensen

This study aims to examine institutional ownership of companies that go public with dual-class share structures.

Abstract

Purpose

This study aims to examine institutional ownership of companies that go public with dual-class share structures.

Design/methodology/approach

Several recent studies have discussed the potential advantages and disadvantages of the dual-class structure, which allows founders and insiders to maintain control of the firms they created through superior voting rights. Institutional investors oppose the dual-class structure, arguing that inferior voting rights make it difficult to respond to poor governance or performance. Previous research has shown the early value-added to the dual-class firm declines through time. This study examines institutional ownership of dual-class companies through time and compares institutional investments in initial public offerings with perpetual superior-class structures versus those with provisions to sunset those shares to one-share, one-vote structures.

Findings

Evidence suggests that institutional investors view perpetual dual-class structures as potentially riskier in terms of poor governance or performance and prefer dual-class companies with sunset provisions.

Originality/value

This study suggests that founders and insiders should consider either the dual-class structure with a sunset provision or if they choose the perpetual dual-class, it should include some type of event-driven safeguards.

Details

Journal of Financial Economic Policy, vol. 13 no. 2
Type: Research Article
ISSN: 1757-6385

Keywords

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