Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2008
Abstract
The existing literature argues that diversified firms may be undervalued due to the information asymmetry between a firm's management and the market. Splitting the firm's divisions into multiple business components is thought to 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 that the level of information asymmetry decreases to a certain extent following the spinoff. We also find that the sample firms are valued at a substantial discount before the spinoff and that the valuation discount is eliminated after the completion of the spinoff. The matching firms, however, do not trade at a significant discount either pre- or post-spinoff. This 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.
Keywords
Asymmetric information, diversified firms, conglomerate discount, spinoff
Discipline
Finance
Research Areas
Finance
Identifier
10.2139/ssrn.1103724
Publisher
SSRN
Citation
CHAROENWONG, Charlie; DING, Kuan Yong David; and PAN, Jing.
Asymmetric information and conglomerate discount: Evidence from spinoffs. (2008).
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6444
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
http://doi.org/10.2139/ssrn.1103724