Perverse Incentives of Special Purpose Acquisition Companies, the 'Poor Man’s Private Equity Funds'
56 Pages Posted: 1 Sep 2012 Last revised: 13 Oct 2016
Date Written: October 12, 2016
Special purpose acquisition companies (SPACs) are an alternative investment, structured as a one-shot private equity (PE) deal. Significant cross-sectional variation exists in SPACs' performance, which can be explained by the strong implicit incentives embedded in contracts. SPAC performance is worse for acquisitions announced near the predetermined two-year deadline, for acquisitions with deferred initial public offering underwriting fees, and for acquisitions with market value close to the required 80% threshold. Also, sponsors' involvement in the merged firm's governance improves long-term performance. This evidence has important implications given SPACs' high popularity in recent years and the new PE industry's trend toward deal-by-deal fund-raising.
Keywords: SPACs, Private equity, IPOs, Incentives, Contract design
JEL Classification: G29, G34
Suggested Citation: Suggested Citation