The Incentives of SPAC Sponsors

The market of Special Purpose Acquisition Companies (SPACs) has exploded in recent years, yet its volatile performance calls into question the implications of this unique business model and particularly the incentives of the SPAC sponsors on the welfare of SPAC shareholders. This paper quantitatively studies these questions by estimating a model featuring the strategic interactions between SPAC sponsors, targets, and investors. The estimation uses a comprehensive hand-collected dataset of SPACs that completed acquisitions between 2009 and April 2022 with rich information such as sponsor concessions, earnouts, redemptions, etc. Agency costs appear pervasive: the inter-quintile range of returns to non-redeeming shareholders reaches 19% in deals sorted by their agency conflicts. Average SPAC investors make sizeable mistakes in inferring deal quality, leading them to earn a 7% lower return. Tying more of the sponsor's promote shares to earnouts significantly reduces the agency cost and improves investors' expected return, while cutting back the issuance of warrants has a limited impact on the average SPAC investors' welfare.