Segmented Going-Public Markets and the Demand for SPACs

This paper provides a unified explanation for the existence, time-series variation, and recent boom of the Special Purpose Acquisition Company (SPAC). We begin by documenting four empirical patterns regarding U.S. SPACs: (1) SPAC issuance boomed in 2007 prior to the Global Financial Crisis and accelerated from 2015 to 2020. (2) The market share of SPACs is strongly positively correlated with equity market sentiment. (3) SPAC operating firms are smaller, younger, and riskier at the moment of going public than firms that IPO traditionally. (4) SPAC firms grow at similar or even higher rates compared to IPO firms in the three years after going public. We develop a theoretical framework of segmented going-public markets that can jointly explain these facts. Our model demonstrates that the SPAC and IPO market structures generate differing incentives for intermediaries in the two markets. SPAC sponsors act as non-bank certification intermediaries and match yield-seeking investors with smaller and riskier operating firms, while investment banks take larger and safer operating firms public in the traditional IPO market. Finally, given these findings, we discuss the importance of aligning sponsors with long-term investors and provide recommendations for an improved SPAC structure.