Signing blank checks: The roles of reputation and disclosure in the face of limited information

Abstract

In this study we examine the role of disclosure and managerial reputation in firms’ ability to raise capital, by studying Special Purpose Acquisition Companies (SPACs or “blank check companies”). These firms IPO prior to having any commercial operations or substantive assets with the promise to acquire or merge with a private firm, generally within two years. Given the limited information, it is unclear how these firms attract investors. We find evidence that language contained in the prospectus disclosures are associated with funds raised. Moreover, the relation between the language used and the capital raised depends on where the language is found in the S-1. Our evidence also suggests that managers with SPAC experience, as well as former CEOs and celebrity sponsors raise more funds than management teams lacking these characteristics. Finally, we find some evidence that investors rely on disclosure differently when the management team has relevant (i.e., SPAC) experience.

Keywords: Disclosure, Managerial reputation, SPAC, Special purpose acquisition companies, IPO

JEL Classification: G24, G34, M41, M50