The Incentives of SPAC Sponsors

Abstract

This paper quantitatively studies the incentives of the sponsors of Special Purpose Acquisition Companies (SPACs) and their impact on SPAC investor welfare. We estimate a structural model featuring the strategic interactions between sponsors, targets, and investors using a hand-collected dataset with rich information such as sponsor concessions, earnouts, redemptions, etc. Agency costs appear pervasive: the inter-quintile range of returns reaches 19% for deals sorted on the extent of agency conflict. Tying more of the sponsor’s promote to earnouts and improving information transparency each significantly improve investors’ welfare, while curtailing the issuance of warrants yields only modest improvement.

Keywords: SPAC, Agency Cost, Information Friction, Structural Estimation

JEL Classification: G20, G23, G34, D82