The Incentives of SPAC Sponsors

Abstract

Special Purpose Acquisition Companies (SPACs) took Wall Street by storm in 2020/2021 and continue to play a significant role in today’s capital markets. Estimating a structural model using a hand-collected comprehensive dataset, we find that SPACs add value by identifying and bringing high-potential firms to public markets, though contractual frictions skew the distribution of spoils away from SPAC shareholders and towards sponsors and target owners. Nonetheless, shareholder excess returns are positive once redemptions are accounted for. Policy analyses reveal that earnout provisions enhance welfare, while modest improvement in disclosure and limits on warrant usage have minimal impact on improving outcomes.

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

JEL Classification: G20, G23, G34, D82