Segmented Going-Public Markets and the Demand for SPACs

70 Pages Posted: 16 Feb 2021 Last revised: 23 Jun 2023

See all articles by Jessica Bai

Jessica Bai

Harvard University, Department of Economics

Angela Ma

Harvard University - Business School (HBS); Harvard University, Department of Economics

Miles Zheng

Texas Christian University - M.J. Neeley School of Business

Date Written: January 1, 2021

Abstract

We provide a regulatory-arbitrage-based explanation for the origin and proliferation of the Special Purpose Acquisition Company (SPAC). SPAC sponsors act as non-bank intermediaries, and the SPAC market structure appeals to yield-seeking investors and riskier, high-growth issuers overlooked by downside-averse bank underwriters. Data from 2003-2020 support these predictions. SPAC firms are smaller, younger, and riskier than traditional IPO firms but grow revenue at higher rates after going public. Equity market investor sentiment strongly predicts SPAC capital raises relative to traditional IPOs. Finally, a difference-in-differences analysis shows that an increase in IPO litigation risk generates a shift towards SPACs.

Keywords: SPAC, IPO, Non-Bank Intermediaries, Adverse Selection, Regulatory Arbitrage

JEL Classification: G24, G32

Suggested Citation

Bai, Jessica and Ma, Angela and Zheng, Miles, Segmented Going-Public Markets and the Demand for SPACs (January 1, 2021). Available at SSRN: https://ssrn.com/abstract=3746490 or http://dx.doi.org/10.2139/ssrn.3746490

Jessica Bai

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Angela Ma

Harvard University - Business School (HBS) ( email )

Boston, MA 02163
United States

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Miles Zheng (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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