Clauses with Claws: Reducing Agency Costs in Late-Merging SPACs

Existing theory predicts that deadline driven agency distortions arise even under optimal contracting. We show that ex-ante contract design can substantially attenuate these distortions in practice. Leveraging the unique institutional features of special purpose acquisition companies (SPACs), we re-examine the relationship between economic contracting and merger outcomes. We find that contingency clauses can mitigate high agency costs that become especially pronounced near the SPAC liquidation deadline by aligning manager and shareholder interests. Late merging SPACs without such clauses underperform, with 9-11% lower merger announcement returns and 19% lower post-merger ROA. Notably, SPAC contingency clauses are only performative when agency costs are high, underscoring their importance in improving the quality of late SPAC mergers. These results provide a channel by which SPACs can be constructed to minimize agency costs born of the SPAC structure, informing regulatory policy.