SPACs and Risk Factor Disclosures

During 2020 and 2021, Special Purpose Acquisition Companies (“SPACs”) became a popular alternative to going public, especially for young and risky firms. This study investigates the informativeness of risk factor disclosures in SPACs’ proxy statements. I find that SPACs with more specific risk information disclosed in the proxy statements have greater redemption rates. This result suggests that shareholders are more likely to withdraw their capital in response to more specific risk factor disclosures. The cross-sectional analyses show that the positive association between the specific risk factor disclosures and redemption rates exists particularly in SPACs with sponsor teams having less PE/VC or CEO experience, and SPACs with more retail investor ownership. I also document that SPACs with more specific risk factor disclosures have greater post-merger stock return volatility but are less likely to experience a significant decrease in net income during post-merger periods. Overall, the findings suggest that SPAC shareholders incorporate specific risk factor disclosures for their decision-making; however, they may overreact to these specific risk factor disclosures and interpret such information incorrectly.