Social Connections, SPAC Mergers, and Check-and-Balance Mechanisms

In this paper, I examine the influence of social connections of SPAC sponsors on the fundraising and target-search process, and I then examine how these connections relate to target quality. I show that SPACs that are managed by well-connected sponsors are able to raise more capital through IPOs and spend less time target-searching. To address endogeneity concerns in the regression analysis, I conduct a controlled experiment to better identify the effects of direct connections between SPACs and targets on pair-formation decisions. I find that targets proposed by well-connected SPACs tend to be of lower quality. Consistent with the notion that well-connected sponsors expend less effort evaluating target quality, I find that the negative relationship between sponsors’ social connections and target quality is most pronounced in SPACs that lack check-and-balance mechanisms that align the sponsors’ interests with those of investors. Overall, this paper shows that social connections play an important role in SPAC mergers and offers new insights into the role of sponsors in the SPAC industry