Learning from the Market: The Choice Between IPOs and SPAC Mergers

I study when a firm should go public and if it does, whether it should choose IPO or SPAC merger. One of the main benefits of going public is that the firm can make investment decisions based on the information produced by the financial markets. The cost is that the firm has to pay for the information production. By developing a tractable dynamic model, I find that an early-stage firm with more uncertainty about its quality chooses a SPAC because its investment decisions can benefit from the more precise information produced in a SPAC merger. In contrast, a late-stage high-quality firm chooses to go public via IPO because it does not need to pay for the extra information produced in a SPAC merger. Using Simulated Method of Moments, I find that information production costs $52 ($121) million in an IPO (SPAC merger). A successful IPO (SPAC merger) increases the firm’s value by 4.1% (34.3%), which rises (drops) to 6.7% (17.3%) in a counterfactual setting where SPAC merger (IPO) is chosen instead.