Title

Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs

Publication Type

Conference Paper

Publication Date

10-2007

Abstract

The existing literature argues that diversified firms may be undervalued due to information asymmetry between a firm’s management and the market. Splitting the firm’s divisions into multiple business components will facilitate the market valuation of each component more accurately. We investigate the information hypothesis from corporate spinoffs from 1981 through 2004. We use the post-spinoff data to reconstruct the diversified firm, assess the improvement in value at the combined firm level, and relate the value improvement to the change in the level of information asymmetry. We find that, prior to the spinoff, the sample firms have significantly higher levels of information asymmetry than their industry- and size-matched peers and the level of information asymmetry decreases slightly following the spinoff. We also find that the sample firms are valued at a substantial discount before the spinoff and the valuation discount is eliminated after the completion of the spinoff. The matching firms, however, do not trade a significant discount either pre- or post-spinoff, which is consistent with the view that only undervalued firms divest. More importantly, we find that the change in excess value around the spinoff is significantly and negatively related to the change in the level of information asymmetry. We conclude that information asymmetry is at least partly responsible for the diversification discount.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Financial Management Association International Conference, 17-20 October 2007, Orlando

City or Country

Orlando, Fl

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