Should SPAC Forecasts be Sacked?

Abstract

Companies that go public through a special purpose acquisition company (SPAC) are merger targets of an already-public firm, and as such, their forward looking statements (FLS) are protected under the Private Securities Litigation Reform Act. In this paper, we study the characteristics of and investor responses to SPAC targets’ revenue forecasts. We show that higher revenue growth projections are more likely to be optimistically biased. We also document a positive association between the compound annual growth rate in projected revenue and both market returns and abnormal retail trading during the five-day event window around the investor presentation. Last, we show that the stocks of firms with high projections underperform stocks of comparable firms during the two-year span following the SPAC merger. Overall, our results attest to the recent concerns expressed by both the SEC and the financial press, that SPAC firms’ aggressive revenue projections attract retail investors, who end up faring worse on their investment.

Keywords: SPACs, financial projections, IPOs, retail investors

JEL Classification: G34, G32, M40, M48