University at Buffalo School of Management

20 Buffalo Business Autumn 2022 Insights Investors lose out when investing in 'blank-check' SPACs Study sheds light on hot Wall Street trend The more revenue growth a company proj- ects when it announces it will be acquired by a special purchase acquisi- tion company (SPAC), the more investors buy the SPAC's stock—and the less likely those projec- tions are to come true, according to new School of Management research. The project is one of the first large- scale studies on the revenue forecasts that SPAC target firms disclose in their investor presentations. "Due to litigation concerns, companies that go public via a traditional initial public offering cannot provide forward-looking information to investors—but SPAC acqui- sitions fall under different regulations that allow them to make financial projections," says Michael Dambra, associate professor of accounting and law. "Practitioners, regulators and the media have all expressed concern about the economic consequences of forward-look- ing statements from highly speculative, newly public firms," Dambra continues. "But previously, there was little evidence on the frequency of such disclosures or whether capital markets find those statements infor- mative. Our study fills that gap." SPACs are blank-check "shell compa- nies" that raise capital to acquire a private company, a transaction known as a de-SPAC. In the past two years, the number of SPAC IPOs has more than doubled traditional IPOs. The researchers analyzed hand-col- lected data on financial projections for 142 de-SPAC transactions from 2010 to 2020. They found more than 90% of SPAC targets provide at least one financial forecast, with revenue being most common. The study showed that when SPAC target firms make extreme revenue projections, capital markets respond favorably and the firm attracts retail investors. But once the firm enters the public market, they significantly underperform compared to their projections— and peers. The researchers say investors should be cautious of any forecasts included in SPAC merger announcements. "Firms going public via a SPAC acqui- sition exploit safe harbor provisions and provide misleading projections to elicit investments, especially from retail inves- tors," says Dambra. "These companies are more likely to destroy long-term shareholder value, echoing concern from regulators and scholars that these lax regulations give firms a license to lie." Dambra KUDOS Congratulations to the following School of Management faculty on their recent accomplishments: Kee Chung, the Louis M. Jacobs Professor of Financial Planning and Control, was named to The World's Top 2% Scientists list by Stanford University and to the Highly Cited Researchers list by Clarivate Analytics. Haimonti Dutta, assistant professor of management science and systems, has received a fellowship from the American Institute of Indian Studies, funded by a grant from the National Endowment for the Humanities. David Murray, clinical professor of management science and systems, was honored with the Arjang A. Assad Excellence in Teaching Award and was selected as a SUNY Online Teaching Ambassador for 2022. Natalie Simpson, associate professor and chair of operations management and strategy, received the Decision Sciences Institute's 2021 Instructional Innovation Award. Aditya Vedantam, assistant professor of operations management and strategy, was part of a UB collaboration that received $4.5 million from the New York State Department of Environmental Conservation to create a plastics recycling research center. N E W S A B O U T FA C U LT Y A N D T H E I R R E S E A R C H

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