Why SPAC Investors Should Listen to the Market

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

Tim Jenkinson

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

Miguel Sousa

School of Economics and Management, University of Porto

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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

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

Tim Jenkinson (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288916 (Phone)
+44 1865 288831 (Fax)

HOME PAGE: http://www.sbs.oxford.edu/timjenkinson

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Miguel Sousa

School of Economics and Management, University of Porto ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

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