A Hard Look at SPAC Projections

Abstract

Firms’ use of special purpose acquisition companies (SPACs) to go public has increased dramatically, leading to market and regulatory debate about their use of projections. Examining SPAC mergers from 2004 through 2021, we find that 80% of firms provide projections for four years ahead on average, with approximately one-quarter of recent projections extending more than five years. For the sample of SPAC mergers with observable postmerger revenue, we find that only 35% of firms meet or beat their projections. This proportion declines for forecasts that are longer horizon, and nonserial SPAC sponsors miss forecasts by greater percentages. When we compare SPAC projected revenue growth with benchmark samples of firms completing an initial public offering (IPO) and matched firms, the SPAC projections are approximately three times larger on average than benchmark firms’ actual revenue growth, with even greater differences for long-term projections. After the merger, firms reduce their use of projections, providing them at statistically similar rates as benchmark firms. Overall, the evidence supports concerns that the SPAC merger includes highly optimistic projections. This paper was accepted by Suraj Srinivasan, accounting.