Acquisitions made with a Special Purpose Acquisition Company (SPAC) are more likely to have mistakes in their financial statements than a traditional initial public offering (IPO), University of Iowa researcher Ryan Wilson said on The Voice of Corporate Governance podcast.
Their study looked at data for post-merger SPAC firms and companies that went public from 2006 to 2020.
They found that SPAC firms after an acquisition had a 9% higher likelihood of restatements due to errors, more amended returns, a higher percentage of internal control weaknesses identified by auditors and management teams, and more untimely filings. The study said investors respond less to earnings surprises from SPAC firms than IPO firms, meaning it’s likely less weight is being placed on SPAC disclosures by investors.
“I think our analysis does confirm a lot of speculation you’ve seen in the media about the quality of the some accounting information of the SPAC firms,” he said during the podcast, while noting it’s not a perfect “apples to apples comparison.”
“I don’t know that [the findings] should be hugely concerning. It’s always a tradeoff between the cost around going public and having really high quality information in public filings. This SPAC process is more compressed than the IPO process,” he added.
SPACs, similar to a shell company often sponsored by a team of investors, are formed to raise capital through an IPO to then use those funds and acquire an operating business. Once acquired, a new publicly traded company is formed. However, there are risks associated with SPACs as well, according to CNBC.
“We were intrigued by the boom in SPACs that ran from 2020-2021, and it got our attention as accounting professors,” he said. “We wondered what the effect would be on accounting outcomes.”
Mr. Wilson said investors should be aware these filings could have less reliable information when making financial decisions.
