A Hard Look at SPAC Projections

Elizabeth Blankespoor is an Associate Professor of Accounting and the Marguerite Reimers Endowed Faculty Fellow at Washington University; Bradley Hendricks is an Assistant Professor of Accounting at the University of North Carolina at Chapel Hill; Gregory Miller is the Ernst and Young Professor of Accounting at the University of Michigan; and Douglas Stockbridge is a PhD candidate in Accounting at the University of Michigan. This post is based on their recent paper.

In recent years, the number of special purpose acquisition companies (SPACs) has risen exponentially. Relative to 2010 when SPACs raised $0.1 billion and accounted for 0.3% of IPOs, SPACs in 2020 raised $75.3 billion and accounted for 54.9% of IPOs. In 2021, SPACs more than doubled their 2020 totals, raising in excess of $160 billion.

Practitioners suggest a possible reason for this increased interest is that SPACs enable firms going public to focus more on forward-looking information. Safe harbor protections under the Private Securities Litigation Reform Act (PSLRA) extend to companies completing mergers (e.g., SPACs), unlike IPO firms. The ability to give projections has been lauded by SPACs and their target companies. In our paper, A Hard Look at SPAC Projections, which was recently accepted by Management Science, we seek to inform the current SPAC discourse by providing timely, comprehensive, and independent evidence of their use of financial projections. Our study is motivated not only by concerns that the SPAC structure provides incentives to issue optimistic projections, but also by reports in the financial press and from the SEC administration that SPAC projections appear out of line with business fundamentals. Consistent with these concerns, the U.S. House Committee on Financial Services released draft legislation in May 2021 that proposed excluding SPACs from the safe harbor for forward-looking statements.

We begin by compiling information on all SPAC mergers during the past twenty years, finding that the great majority (80%) of the mergers in our sample provide at least one financial projection. Revenue and EBITDA projections are the most common, appearing in 98% and 85% of mergers that include future projections. The average projection extends nearly four years into the future. The long horizon projections for these uncertain ventures are surprising given prior evidence that firms facing more uncertainty issue fewer forecasts and that publicly traded companies rarely inform outsiders of their internal expectations more than one or two years into the future, despite safe-harbor-type provisions.

We next consider the accuracy of SPAC projections. Because the majority of SPACs occurred in the last few years and many forecasts are long-term, we cannot examine the accuracy of all forecasts in our sample. However, for those where sufficient time has passed to observe whether the firm meets their revenue projection, we find that firms meet only 35% of the forecasts. The proportion met declines for longer horizons, and firms merging with non-serial SPAC sponsors miss forecasts by greater percentages.

To delve deeper into SPAC forecasts’ optimism, we compare SPACs’ projected revenue growth to the actual revenue growth of 1) the population of recent IPO firms, and 2) a matched sample of public firms. This allows us to include projections from recent mergers for which outcomes are not observable yet, and it provides information about how well the SPAC firm must perform relative to other firms to meet the projections. We find that the projected average annual revenue growth rate for SPACs (116%) is substantially higher than the actual mean revenue growth rate for recent IPO firms (41%) or the matched sample (36%). Also, the magnitude of the difference increases over the forecast horizon, consistent with studies that find a negative relation between forecast horizon and forecast accuracy (Baginski and Hassell 1997). To facilitate interpretation of the economic magnitude, we compare SPACs’ projected revenue growth rate distribution to IPO firms’ actual revenue growth rate distribution, finding that the average 1-year (5-year) revenue growth projections correspond to the 86th (97th) percentile of IPO firms’ actual revenue growth. This correspondence to exceptionally high levels of observed revenue growth further suggests SPACs are at high risk of not meeting their projections.

Finally, we examine firms’ projections following the merger. This analysis is motivated by reports that SPACs may use lengthy projections to attract investor interest and then cease providing guidance when the merger is approved. We find that only 38% of firms issue any form of guidance during the year after the merger’s completion. Further, when firms do provide post-merger guidance, the average horizon is only 0.61 years. This duration is not statistically different from the average guidance length of recent IPO firms or the matched sample, yet is a dramatic reduction from the forecasts provided during the de-SPAC process. These findings suggest that both the high proportion of firms making projections and the multi-year nature of these projections have more to do with the SPAC setting itself than firm attributes.

The paper makes several contributions to the literature. First, we inform the current discourse around SPACs. While SPACs’ use of projections has been widely discussed by practitioners and regulators, the evidence referenced is typically anecdotal. In contrast, we gather and systematically examine the population of SPACs in the last twenty years, benchmarking SPAC projections against their own future performance when observable and against the performance of recent IPO firms and a matched sample of publicly traded firms. Our analyses produce independent evidence that supports concerns that SPAC projections appear out-of-line with business fundamentals.

We also extend the management forecasting literature by providing evidence on the use and informativeness of multi-year management forecasts and by contributing to the literature examining management forecasts of firms going public. Because IPO firms in the United States rarely provide such forecasts, perhaps due in part to PSLRA safe harbor protections not extending to them, these studies are in non-US settings. Gounopoulis (2011) reviews 22 studies in 11 different countries, concluding that most find evidence of optimistic forecasts. We thus complement and extend this literature by providing evidence on the use and accuracy of multi-year forecasts for a sample of firms going public in the US.

The complete paper is available here.

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