Why SPAC Investors Should Listen to the Market
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
University of Oxford - Said Business School; School of Economics and Management, University of Porto
February 12, 2009
EFA 2009 Bergen Meetings Paper
AFA 2010 Atlanta Meetings Paper
Special purpose acquisition companies (SPACs) have raised around $22bn from investors since 2003, and comprised 20% of total funds raised in US IPOs in 2007. SPACs are interesting structures - allowing investors a risk-free option to invest in a future acquisition. However, we show that more than one-half of approved deals immediately destroy value. Investors, who can observe the market's view of the proposed deal, as well as that of the founders, should listen to the market, since the extreme incentives faced by the SPAC founders create corresponding conflicts of interest. We propose a simple, observable rule - based on market prices - which investors should heed.
Number of Pages in PDF File: 35
Keywords: SPACs, cash shells, IPOs, private equity
JEL Classification: G14, G34working papers series
Date posted: February 12, 2009 ; Last revised: March 17, 2009
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