Security Issuance, Institutional Investors and Quid Pro Quo

TL;DR

This paper investigates how institutional investors influence securities issuance through SPACs, revealing distinct roles of premium and non-premium investors in mitigating agency issues and informational frictions.

Contribution

It uncovers the different behaviors of premium and non-premium investors in SPACs, highlighting their impact on market access and agency problems.

Findings

Premium investors are linked to lower liquidation risk and higher returns.

Non-premium investors engage in quid pro quo relationships for higher returns.

These relationships facilitate market access for issuers and intermediaries.

Abstract

Securities issuance through intermediaries is subject to agency problems and informational frictions. We examine these effects using SPAC data. We identify ``premium'' investors whose participation is linked to lower liquidation risk, higher returns, and lower redemption rates, consistent with both informational rents and agency frictions. In contrast, ``non-premium'' investors engage in non-agency quid pro quo relationships. Specifically, they receive high returns from an intermediary (quid) in exchange for a tacit agreement to participate in weaker future deals (quo). These relationships serve as insurance for issuers and intermediaries, enabling more issuers to access markets.