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Communication under Uncertainty and the Role of Founders’ Information Advantage: Evidence from SPAC IPOs

Journal Article
This study develops a novel framework about how a firm’s financing outcome will be shaped by its communication under different types of uncertainty. Whereas prior work has largely focused on uncertainties that arise because of founders having a knowledge advantage over investors, the authors examine a firm’s communication in situations of more fundamental uncertainty when both founders and investors face knowledge problems. The authors' framework proposes that in situations where founders have a knowledge advantage over investors (i.e., when there is information asymmetry), firms that reduce uncertainty by sending signals of quality and express less uncertainty in their communications will enjoy better financing outcomes. However, the authors argue that in situations characterized by high unknowability, and where founders do not have a significant knowledge advantage over investors (i.e., when there is Knightian uncertainty), firms that acknowledge this unknowability by expressing more uncertainty in their communications will have more favorable financing outcomes. Studying the full population of special purpose acquisition companies (SPACs) that sought to complete an initial public offering from the emergence of the sector in 2003–2019, the authors find support for their predictions. This study expands their understanding of the role of uncertainty in investment decisions, offers deeper insight into how language operates in financial markets, and sheds light on the increasingly popular, but understudied, SPAC vehicle.
Faculty

Associate Professor of Entrepreneurship and Family Enterprise