Why SPAC Investors Should Listen to the Market

Abstract

Special purpose acquisition companies (SPACs) raised over $22bn from investors during the period 2003-2010, representing a significant proportion of US initial public offerings (IPOs). SPACs are interesting structures – providing investors with very low risk options to invest in future acquisitions. However, we show that more than one-half of approved deals immediately destroyed 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.