A Dynamic Delegated Investment Model of SPACs

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