Harnessing the overconfidence of the crowd: A theory of SPACs

Snehal Banerjee, Martin Szydlowski

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


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.

Original languageEnglish (US)
Article number103787
JournalJournal of Financial Economics
StatePublished - Mar 2024
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2024 Elsevier B.V.


  • Overconfidence
  • Redeemable shares
  • SPACs


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