Information Risk and Stock Returns of Companies Going Public by Merging with SPACs

The proposed new SEC (2022) rules suggest that the information risk may be unusually high for companies going public by merging with SPACs (“SPAC-IPOs”). We study the merits of this “information risk” hypothesis and then examine whether the high information risk also explains SPAC-IPOs’ stock underperformance. We find that relative to traditional IPOs, SPAC-IPOs are more likely to: (1) be associated with lower financial statement quality, (2) retain a non-Big 4 auditor, (3) be associated with lower earnings/accruals persistence, (4) avoid listing on the NYSE, and (5) get delisted from a stock exchange. These factors collectively suggest that the information risk is about 71% higher for SPAC-IPOs than for non-SPAC-IPOs. The higher risk persists three years into the SPAC-IPO’s public listing. Finally, we demonstrate that the variation in the information risk explains the poor stock performance of SPAC-IPOs. To the extent the regulatory initiatives are intended to address the information risk in de-SPAC transactions, SPAC-IPO investors are the likely beneficiaries of this regulation