Harnessing the overconfidence of the crowd: A theory of SPACs

Snehal Banerjee and Martin Szydlowski

Journal of Financial Economics, 2024, vol. 153, issue C

Abstract: In a SPAC transaction, a sponsor raises financing from investors using redeemable shares and rights. When investors are sophisticated, these features dilute the sponsor's stake and can lead to underinvestment in profitable targets. However, when investors are overconfident about their ability to respond to interim news, the optionality in such features is overpriced, and SPACs can lead to over-investment in unprofitable targets. Consistent with empirical evidence, the model predicts different returns for short-term and long-term investors and overall underperformance. While some policy interventions (e.g., eliminating redemption rights, limiting investor access, and restricting warrants) improve returns for unsophisticated investors, others (e.g., increased disclosure) can be counterproductive.

Keywords: SPACs; Overconfidence; Redeemable shares (search for similar items in EconPapers)
JEL-codes: D86 D90 G23 G24 G32 G41 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:153:y:2024:i:c:s0304405x24000102

DOI: 10.1016/j.jfineco.2024.103787

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