Security Design for a Non-standard IPO: The Case of SPACs

49 Pages Posted: 17 Mar 2014 Last revised: 17 Apr 2018

See all articles by Sris Chatterjee

Sris Chatterjee

Fordham University - Gabelli School of Business

N.K. Chidambaran

Fordham University - Gabelli School of Business

Gautam Goswami

Fordham University - Finance Area

Date Written: March 15, 2014

Abstract

A Special Purpose Acquisition Company (SPAC) is a public entity set up by a founder for the specific purpose of acquiring another firm, typically a private firm. The acquired firm is publicly traded after the acquisition, and the acquisition in effect represents a non-standard approach for the private firm to go public. In this paper, we develop a theoretical framework to explain several unique features of the SPAC design such as the prevalence of unit offerings and the use of equity and warrants in the founder’s contract. The founder in our model undertakes costly effort to learn about the characteristics of the acquisition target and delivers a good quality firm to the SPAC shareholders. We show that the warrants play a unique role in limiting the level of risk of firms that the founder selects for acquisition. We also show that the equity grant given to the SPAC founder pre-commits the SPAC shareholders and firms to a pre-determined level of underpricing for the non-standard SPAC IPO process.

Keywords: SPAC, Mergers and Acquisitions, Blank Check, Unit IPO

JEL Classification: G24, G34

Suggested Citation

Chatterjee, Sris and Chidambaran, N.K. and Goswami, Gautam, Security Design for a Non-standard IPO: The Case of SPACs (March 15, 2014). Journal of International Money and Finance 69 (2016) 151–178, Available at SSRN: https://ssrn.com/abstract=2409726 or http://dx.doi.org/10.2139/ssrn.2409726

Sris Chatterjee (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

N.K. Chidambaran

Fordham University - Gabelli School of Business ( email )

United States

Gautam Goswami

Fordham University - Finance Area ( email )

33 West 60th Street
New York, NY 10023
United States
212-636-6181 (Phone)
212-765-5573 (Fax)

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