Fraud risk implications of celebrity SPACs

Reem Zaabalawi, Gregory Domenic VanderPyl, Daniel Fredrick, Kimberly Gleason and Deborah Smith

Journal of Financial Crime, 2024, vol. 31, issue 6, 1592-1609

Abstract: Purpose - The purpose of this study is to extend the Fraud Diamond Theory to celebrity Special Purpose Acquisition Companies (SPACs) and investigate their post-Initial Public Offering (IPO) stock market performance. Design/methodology/approach - After obtaining a sample of celebrity SPACs from the Spacresearch.com database, fraud risk characteristics were obtained from Lexis Nexus searches. Buy and hold abnormal returns were calculated for celebrity SPACs versus a small-cap equity benchmark for time intervals after IPO, and multiple regression analysis was performed to examine the relationship between fraud risk features and post-IPO returns. Findings - Celebrity SPACs exhibit Fraud Diamond characteristics and significantly underperform a small-cap stock portfolio on a risk-adjusted basis after IPO. Research limitations/implications - This study only examines celebrity SPACs that conducted IPOs on the NYSE and NASDAQ/AMEX and does not include those that are traded on the Over the Counter Bulletin Board (OTCBB). Practical implications - Celebrity endorsement of SPAC vehicles attracts investors who may not be properly informed regarding the risk characteristics of SPACs. Accordingly, investors should be warned that celebrity SPACs underperform a small-cap equity portfolio and exhibit significant elements of fraud risk. Social implications - The use of celebrity endorsement as a marketing device to attract investment in SPACs has regulatory implications. Originality/value - To the best of the authors’ knowledge, this paper is the first to examine the fraud risk characteristics and post-IPO performance of celebrity SPACs.

Keywords: Celebrities; Fraud diamond; SPAC (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfcpps:jfc-01-2024-0002

DOI: 10.1108/JFC-01-2024-0002

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