This paper studies insider trading to examine undervaluation as a motive behind corporate spinoffs. We show an unmistakable increase (decrease) in the number of insider purchases (sales) and net purchases (sales) in the four quarters prior to a spinoff announcement. In addition, relative to a benchmark period, insider selling is significantly lower, and their net purchases significantlyhigher,in the three quarters prior to a spinoff announcement compared to other periods. We find that announcement period excess returns for abnormal net insider purchases are significantly higher than excess returns for abnormal net insider sales. Moreover, only firms with abnormal net insider purchases exhibit significant improvement in theirlong-run market and operating performance after a spinoff. The results suggest that undervaluation is an important motive behind corporate spinoffs and that it is possible to identify the quality of a spinoff firm on the basis of insider trading behavior prior to its announcement.
insider trading, undervaluation, corporate spinoffs
Corporate Finance | Finance and Financial Management
New Zealand Finance Colloquium 2016, February 11-12
City or Country
Queenstown, New Zealand
CHAROENWONG, Charlie; DING, Kuan Yong David; and PAN, Jing.
Insider Trading and Corporate Spinoffs. (2016). New Zealand Finance Colloquium 2016, February 11-12. 1-28. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/4994
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