In a SPAC transaction, a sponsor raises financing from investors using redeemable shares and rights. When investors are sophisticated, these features dilute the sponsor's stake and can lead to underinvestment in profitable targets. However, when investors are overconfident about their ability to respond to interim news, the optionality in such features is overpriced, and SPACs can lead to over-investment in unprofitable targets. Consistent with empirical evidence, the model predicts different returns for short-term and long-term investors and overall underperformance. While some policy interventions (e.g., eliminating redemption rights, limiting investor access, and restricting warrants) improve returns for unsophisticated investors, others (e.g., increased disclosure) can be counterproductive.

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.

We develop a model in which a firm's manager can voluntarily disclose to privately informed investors. In equilibrium, the manager only discloses sufficiently favorable news. If the manager is known to be informed but disclosure is costly, the probability of disclosure increases with market liquidity and the stock trades at a discount relative to expected cash flows. However, when investors are uncertain about whether the manager is informed, disclosure can decrease with market liquidity and the stock can trade at a premium relative to expected cash flows. Moreover, contrary to common intuition, public information can crowd in more voluntary disclosure.