TY - JOUR
T1 - Harnessing the overconfidence of the crowd
T2 - A theory of SPACs
AU - Banerjee, Snehal
AU - Szydlowski, Martin
N1 - Publisher Copyright:
© 2024 Elsevier B.V.
PY - 2024/3
Y1 - 2024/3
N2 - 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.
AB - 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.
KW - Overconfidence
KW - Redeemable shares
KW - SPACs
UR - http://www.scopus.com/inward/record.url?scp=85182669871&partnerID=8YFLogxK
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U2 - 10.1016/j.jfineco.2024.103787
DO - 10.1016/j.jfineco.2024.103787
M3 - Article
AN - SCOPUS:85182669871
SN - 0304-405X
VL - 153
JO - Journal of Financial Economics
JF - Journal of Financial Economics
M1 - 103787
ER -