A Dynamic Delegated Investment Model of SPACs

74 Pages Posted: 28 Sep 2021 Last revised: 27 Jul 2022

See all articles by Dan Luo

Dan Luo

The Chinese University of Hong Kong Business School

Jian Sun

Lee Kong Chian School of Business, Singapore Management University

Date Written: July 21, 2022

Abstract

We study SPACs (Special Purpose Acquisition Companies) in a finite-horizon continuous-time delegated investment model. Due to incentive misalignment, the sponsor is more eager to propose unprofitable deals as the SPAC approaches its deadline. As a response, the investor redeems shares more aggressively over time. The investor’s current redemption discourages the sponsor from proposing unprofitable deals, but future redemption reduces the sponsor’s payoff from waiting. We find that prohibiting the investor from redeeming shares in late periods can be a Pareto improvement; coupling the investor’s deal rejection with redemption benefits the sponsor; behavioral investors’ participation can be a Pareto improvement.

Keywords: SPAC, delegated investment, dynamic delegation, moral hazard

JEL Classification: D82, D86, G23

Suggested Citation

Luo, Dan and Sun, Jian, A Dynamic Delegated Investment Model of SPACs (July 21, 2022). Available at SSRN: https://ssrn.com/abstract=3929762 or http://dx.doi.org/10.2139/ssrn.3929762

Dan Luo

The Chinese University of Hong Kong Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Jian Sun (Contact Author)

Lee Kong Chian School of Business, Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

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