Call For Papers for Fall 2023, deadline 8/25
Special Purpose Acquisition Company (SPAC) IPOs boomed starting in 2020. While SPAC IPO investors have earned 9.3% per year, returns for investors in merged companies are more complex. Depending on weighting methods, they have earned -4.0% to -15.6% in the first year on common shares but 15.6% to 44.3% on warrants. We rationalize why certain companies go public via a SPAC merger despite their high costs by identifying the economic roles of SPAC sponsors and investors. Sponsors transfer more than 30% of their compensation to other investors as inducements to complete mergers. SPACs are evolving towards a more sustainable equilibrium.