Is Going Public via SPAC Regulatory Arbitrage? A Textual Analysis Approach

Abstract

We study the firm's incentives and disclosure practice of going public via Special Purpose Acquisition Company (SPAC). We argue that going public via deSPAC merger is regulatory arbitrage, through which firms circumvent the SEC review process in conventional IPO registration and provide less comprehensive but overconfident disclosures to the public. Using textual analysis, we compare the information content of prospectuses and merger proxy statements in deSPAC mergers to their propensity-score-matched IPO peers. We find that deSPAC merger filings contain 44% less pessimistic statements, 59% more definitive statements, and 56% fewer unique financial words. Additionally, we show that the differences in the above-mentioned aspects become negligible in post-public annual report filings, where identical disclosure requirements applied and regulatory arbitrage no longer exists. Lastly, we document the impact of regulatory arbitrage on the firm's litigation risk and stock performance after going public. We call for unified regulations overseeing alternative going-public methods to maintain information transparency and a fair public capital market.

Keywords: SPAC, IPO, Regulatory Arbitrage, Textual Analysis

JEL Classification: G14, G18, G24