Why SPAC Investors Should Listen to the Market

Jenkinson, Tim; Sousa, Miguel

doi:10.2139/ssrn.1331383

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Why SPAC Investors Should Listen to the Market

35 Pages Posted: 22 Jan 2009 Last revised: 13 Feb 2009

See all articles by Tim Jenkinson

Tim Jenkinson

University of Oxford - Said Business School; European Corporate Governance Institute (ECGI)

Miguel Sousa

School of Economics and Management, University of Porto

There are 4 versions of this paper

Date Written: February 12, 2009

Abstract

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.

Keywords: SPACs, cash shells, IPOs, private equity

JEL Classification: G14, G34

Suggested Citation: Suggested Citation

Jenkinson, Tim and Sousa, Miguel, Why SPAC Investors Should Listen to the Market (February 12, 2009). Available at SSRN: https://ssrn.com/abstract=1331383 or http://dx.doi.org/10.2139/ssrn.1331383