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SPACs and Tax: Market Implications of Tax-Disadvantaged SPAC Acquisitions
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SPACs and Tax: Market Implications of Tax-Disadvantaged SPAC Acquisitions

Bradford F. Hepfer, Sean T. McGuire and Junwei Xia
SSRN Electronic Journal
2023
DOI: 10.2139/ssrn.4621384
url
https://doi.org/10.2139/ssrn.4621384View
Preprint (Author's original)This preprint has not been evaluated by subject experts through peer review. Preprints may undergo extensive changes and/or become peer-reviewed journal articles. Open Access

Abstract

We examine U.S. tax costs and Special Purpose Acquisition Company (SPAC) deals. The geographic locations of the SPAC, its target, and the combined entity can trigger significant U.S. tax costs. Because SPAC sponsors lack proper incentives and do not directly bear tax costs, we contend that SPAC sponsors likely ignore these otherwise mitigable costs. We examine the prevalence, pricing, and funding implications of costly, tax-disadvantaged cross-border SPAC deals. While many SPAC deals are structured to mitigate tax costs, a nontrivial portion of SPAC deals are tax-disadvantaged. Relative to U.S.-based same-border deals, we find tax-disadvantaged cross-border deals exhibit lower deal announcement returns and secure less private investment (PIPE). These findings are consistent with SPAC sponsor moral hazard in tax-disadvantaged SPAC acquisitions and should be salient to investors given the shrinking domestic market for SPAC targets and the heightened likelihood of cross-border SPAC deals.

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