Publication Type

Journal Article

Version

publishedVersion

Publication Date

7-2023

Abstract

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 significantly higher, 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 their long-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.

Keywords

Insider trading, Undervaluation, Corporate spinoffs.

Discipline

Corporate Finance | Finance and Financial Management

Research Areas

Finance

Publication

International Journal of Banking and Finance

Volume

18

Issue

2

First Page

1

Last Page

28

ISSN

2811-3799

Identifier

10.32890/ijbf2023.18.2.1

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.32890/ijbf2023.18.2.1

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