SPACs (SSRN) with Jay R. Ritter and Donghang Zhang
Accepted at the Review of Financial Studies
Going public by merging with a Special Purpose Acquisition Company (SPAC) is much more expensive than conducting a traditional IPO. We rationalize why some companies merge with a SPAC by analyzing the potential benefits, and analyze the agency problems that certain SPAC features address. SPAC IPO investors and deal sponsors have earned remarkably high annualized average returns, although we warn that recent deals are likely to disappoint. Public investors in the merged companies have earned very low market-adjusted returns on an equally weighted basis, although high redemptions on the worst deals have limited the amount of money that they lost.
Create Your Own Valuation (Job Market Paper, SSRN)
I find noticeable bunching in the distribution of private company valuations, suggesting that companies stretch valuations to achieve certain targets. I ask how companies do it and why. Newly authorized but unissued shares for future employee compensation (e.g., stock options) account for 11% of the reported valuations. Regression discontinuity design suggests that achieving unicorn status (valuation of $1 billion or higher) makes employees more favorably assess the companies they work for. Textual analysis shows that increased satisfaction with compensation is the main reason. Inflating reported valuations, however, lowers the expected value of employee stock options. Providing simple stock option payoff diagrams to employees can reduce information frictions.
Selling Private Equity Fees (SSRN) with Blake Jackson
Best Paper Award - 14th Annual Private Equity Research Consortium (PERC)
We examine private equity (PE) firms’ minority stake sales and the impact of these sales on agency frictions with fund investors. PE firms that have sold minority stakes – primarily to other PE firms – oversee 27% of PE Assets Under Management in 2020. PE firms with strong fundraising and investment records tend to sell stakes. Sellers subsequently experience substantial increases in capital raised (41%) and income (55%). We find no evidence of deteriorating fund performance. Sellers invest more capital in their funds, increase employment, and make investor-friendly distributions. Our results suggest that the reduced “skin-in-the-game” from stake sales does not exacerbate agency frictions between sellers and their fund investors.