When law professors Michael Ohlrogge and Michael Klausner first started studying special purpose acquisition companies four years ago, they were stunned by what they found. Looking at companies that had merged with SPACs in 2017 and 2018, the valuations were so terrible that the professors wondered why anyone would resort to going public via a SPAC.

Ohlrogge and Klausner, a professor at Stanford Law School, discovered that these costs quickly added up: The dilution from warrants issued in the IPO, along with virtually free shares for sponsors and banking fees for both the IPO and the merger that ended up being two to three times higher for a SPAC than for a traditional IPO, all ate into the amount of cash the companies had once the merger happened. Because the companies passed on these costs to the remaining shareholders, the companies ended up with about 40 percent less cash than they started with.