We explore equilibrium allocation and efficiency when private firms are listed by merging with a Special Purpose Acquisition Company (SPAC), compared with when they are listed through a traditional initial public offering (IPO). We show that a traditional IPO is more informationally efficient than a SPAC, except if the traditional IPO process is significantly long and costly. We also suggest that if the average quality of firms willing to go public decreases, SPAC acquisitions are more likely to occur than traditional IPOs. Our results hold, regardless of whether the measures of underwriters and sponsors are exogenously or endogenously determined.

We explore a continuous-time agency model with double moral hazard. Using a venture capitalist (VC)–entrepreneur relationship where the VC both supplies costly effort and chooses the optimal timing of the initial public offering (IPO), we show that optimal IPO timing is earlier under double moral hazard than under single moral hazard. Our results also indicate that the manager's compensation tends to be paid earlier under double moral hazard. We derive several comparative static results, notably that IPO timing is earlier when the need for monitoring by the VC is smaller and when the volatility of cash flows is larger.