Harnessing the Overconfidence of the Crowd: A Theory of SPACs

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• Martin Szydlowski (Carlson School of Management)
• Thursday 25 November 2021, 13:00-14:00
• Online.

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We provide a theory of Special Purpose Acquisition Companies, or SPA Cs. A sponsor raises financing for a new opportunity from a group of investors with differing ability to process information. We show that when all investors are rational, the sponsor prefers to issue straight equity. However, when sufficiently many investors are overconfident about their ability to process information, the sponsor prefers to issue units with redeemable shares and rights. The model matches many empirical features, including the difference in returns for short-term and long-term investors and the overall underperformance of SPA Cs. We also evaluate the impact of policy interventions, such as greater mandatory disclosure and transparency, limiting investor access, and restricting the rights offered.

This talk is part of the Cambridge Finance Workshop Series series.

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