Are Celebrity SPACs Advantageous or Just Gimmicky?

Special Purpose Acquisition Companies (SPACs) have been around since the 1980s but surged in popularity as the preferred method for private companies to go public in recent years. Celebrity SPACs, those associated with individuals from various industries like show business, sports, and politics, have emerged as a notable subset within this trend.

Celebrity SPACs received intense criticism over concerns that celebrities lack relevant management skills, have potential incentive problems[1], and are merely using SPACs to monetize their reputations. The media, financial analysts, and regulatory bodies, including the Securities and Exchange Commission (SEC), have expressed reservations about the trend.

In a new article, I look at the effect of celebrity involvement in SPACs. Celebrities can bring significant advantages to the SPAC process, including admirable reputations, widespread networks, and business acumen. These factors contribute to the appeal of celebrity SPACs and potentially address informational asymmetry between investors and SPACs. Investors may rely on the strong reputation of a celebrity to gauge the likelihood that a SPAC will execute a profitable acquisition. I examine the role of celebrities in the SPAC process across various dimensions: funding, sponsors’ commitment, acquisition duration, reputation of SPAC’s underwriter and auditor, target firm quality, and post-acquisition performance. The article looks at celebrities in different roles within SPACs, such as CEO, chairperson, board member, executive, or adviser.

Key Findings

Among my finds are that celebrity-affiliated SPACs tend to raise more funds in IPOs than other SPACs do, indicating a positive reception from investors. SPACs affiliated with celebrities raise 40.49 percent more cash than do non-celebrity SPACs. Moreover, sponsors of celebrity SPACs invest 22.26 percent more capital in them than in other SPACs, suggesting a willingness to align their interests with other investors. Celebrity SPACs also complete acquisitions faster than do their non-celebrity counterparts. The closing period for celebrity SPACs is 44 days shorter than that of non-celebrity SPACs.

The quality of intermediaries associated with celebrity SPACs also tends to be higher. These SPACs attract more prestigious[2] underwriters and auditors, possibly due to the reputational capital that celebrities bring to the table. Merged companies of celebrity SPACs have 223 percent higher market caps than non-celebrity SPACs, indicating better overall performance after business combinations.

My study also differentiates the roles celebrities play within SPACs. While SPACs with celebrity chairpersons and board members have greater funding, SPACs with celebrity advisers do not have such an effect. Additionally, celebrities from the entertainment business provide 70.6 percent higher three-month buy and hold abnormal return for the newly merged company after a business merger, while those from the sports business contribute to greater funding and sponsors’ commitment.

Policy Implications

Despite the concerns about celebrity SPACs, the study suggests that regulators should not be alarmed. Instead, I argue that celebrities play a beneficial role in the SPACs, contributing to greater funding, more committed sponsors, faster acquisition, and improved overall performance.

Regulators and legislators should move cautiously, basing any reforms on sound analyses rather than public sentiment. Celebrity SPACs can drive innovation and growth by providing necessary capital to a large pool of private firms.

ENDNOTES

[1] Celebrities will only receive payment from SPACs if they complete an acquisition. Thus, they may be enticed to accept any deal even it is bad for investors.

[2] To estimate the left-lead underwriter prestige, I rank all left-lead underwriters based on their market shares of SPAC offerings from 2015 until 2021. In addition, I rank auditors based on their market shares of SPAC offerings from 2015 until 2021.

This post comes to us from Professor Emre Kuvvet at Nova Southeastern University. It is based on his recent article, “Celebrity SPACs: Advantageous, or Gimmicky?” available here.

1 Comment

  1. Deeply Read

    I find this analysis of Celebrity SPACs to be quite enlightening. The data-driven approach sheds light on the positive aspects of having celebrities involved in the SPAC process. The findings suggest that their admirable reputations, extensive networks, and business acumen contribute significantly to the success of these ventures.

    The higher amount of funds raised by celebrity-affiliated SPACs in IPOs, coupled with the faster acquisition periods and increased commitment from sponsors, paints a picture of a more efficient and potentially more lucrative path to going public. It’s interesting to note that the quality of intermediaries associated with celebrity SPACs tends to be higher, attracting prestigious underwriters and auditors.

    Moreover, the differentiated roles of celebrities within SPACs, such as chairpersons and board members, seem to have a positive impact on funding. The study’s emphasis on a nuanced understanding of the various roles celebrities play provides valuable insights.

    While concerns have been raised about potential incentive problems, the study argues convincingly that celebrities contribute to greater funding, more committed sponsors, faster acquisition, and improved overall performance. The call for regulators to approach the matter cautiously, relying on sound analyses rather than public sentiment, is well-founded.

    In conclusion, the article suggests that Celebrity SPACs have the potential to drive innovation and growth by providing essential capital to private firms. It’s a compelling argument that challenges preconceived notions about the role of celebrities in financial ventures.

    https://deeplyread.blogspot.com

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