SPACs and Forward-Looking Disclosure: Hype or Information?

Abstract

Regulators and legal scholars express concern that SPAC growth results from a disclosure-regulation loophole and that forward-looking disclosure by SPACs can mislead investors. We examine SPAC voluntary disclosure and associated outcomes. SPACs offer a means for firms to become public, but, unlike IPOs, we find SPAC firms frequently provide forward-looking information (e.g., earnings forecasts). Measuring disclosure by tone, the existence of a forecast, forecasting intensity, and forecast growth rates, our results suggest that forward-looking disclosure in SPAC merger announcements does not mislead small investors. Disclosures containing more forecasts are associated with positive returns at the announcement. However, our disclosure measures are not associated with subsequent return reversals. More forecasts are related to positive subsequent return drift, lower redemption rates and bid-ask spreads, and more retail investor buying. We do not find evidence that forecasted sales or EBITDA growth rates are associated with return reversals. In fact, we find a positive relation between forecasted sales growth and returns around the first post-closing earnings announcement. Moreover, correlations between outcomes and disclosure tone are not significant, suggesting that hype, if present, does not sway investors. Our findings do not support the concern that SPACs take advantage of apparent exemption from prosecution under the 1933 Act to hype forward-looking disclosure to deceive shareholders.

Keywords: Forward-looking disclosure, SPAC, Information Asymmetry; Adverse Selection; Liquidity; Disclosure; IPO

JEL Classification: D82, D83, G10, G5, G24, G3, K0