Sponsor reputation and agency conflicts in SPACs

Abstract

We investigate the agency conflict between sponsors and investors in Special Purpose Acquisition Companies (SPACs) and the role of sponsor reputation in such conflict. We find that the effect of reputation depends on whether sponsors are repeat or occasional players in financial markets. SPACs sponsored by private equity firms, who face reputational concerns due to frequent interactions with investors, conduct a more virtuous target selection process as they are less likely to merge but post-merger returns are significantly better. On the other hand, former executives of renowned companies who occasionally launch SPACs make deals more lucrative to themselves, with no benefits to investors.