Reaching for Yield in the Going-Public Market: Evidence from SPACs

57 Pages Posted: 16 Feb 2021 Last revised: 27 Feb 2021

See all articles by Jessica Bai

Jessica Bai

Harvard University, Department of Economics

Angela Ma

Harvard Business School; Harvard University, Department of Economics

Miles Zheng

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: January 1, 2021

Abstract

This paper provides a unified explanation for the existence, time-series variation, and recent boom of the Special Purpose Acquisition Company (SPAC). We develop a theoretical framework in which SPAC and IPO markets serve different types of production firms and public investors. SPAC managers act as non-bank certification intermediaries and match yield-seeking investors with value-creating but risky production firms. Reaching for yield in the going-public market contributes to the rise of SPACs. Our model jointly explains several empirical patterns regarding the U.S. SPAC market: (1) Compared to IPO firms, SPAC firms are ex-ante smaller, riskier, but grow at higher or similar rates after going public. (2) SPAC issuance boomed in 2007 prior to the Global Financial Crisis and accelerated from 2015 to 2020. (3) The market share of SPACs is strongly positively correlated with equity market sentiment. Our model implies that a well-functioning SPAC market improves social welfare and stimulates economic growth by allowing creative, risk-taking firms to go public, increasing innovative activity ex-ante. Finally, we highlight the importance of aligning SPAC managers with long-term investors and provide recommendations for an improved SPAC structure.

Keywords: SPAC, IPO, Going-Public, Reaching-for-Yield, Non-Bank Intermediaries, Adverse Selection, Innovation

JEL Classification: G24, G32

Suggested Citation

Bai, Jessica and Ma, Angela and Zheng, Miles, Reaching for Yield in the Going-Public Market: Evidence from SPACs (January 1, 2021). Available at SSRN: https://ssrn.com/abstract=3746490

Jessica Bai

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Angela Ma

Harvard Business School ( email )

Boston, MA 02163
United States

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Miles Zheng (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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