No abstract

We empirically analyze the information hypothesis that the separation of a "rm's divisions into independently traded units through a spin-o! enhances value because it mitigates information asymmetry about the "rm. Consistent with this hypothesis, we "nd that "rms that engage in spin-o!s have higher levels of information asymmetry compared to their industry and size matched counterparts and the information problems decrease signi"cantly after the spin-o!. The gains around spin-o!s are positively related to the degree of information asymmetry, and this relation is more pronounced for "rms with fewer negative synergies between divisions. Finally, "rms with higher growth opportunities and "rms in need of external capital show a higher propensity to engage in spin-o!s. They also raise more capital following a spin-o!, which is consistent with the view that * Corresponding author. Tel.: #1-504-280-6488; fax: #1-504-280-6397.E-mail address: skrishn1@uno.edu (S. Krishnaswami) ଝWe thank Je!rey Allen, John Bizjak, Peter Brous, Rick Carter, Arnold Cowan, Dave Denis, Dave Ellis, Don Fraser, Steven Pottier, Russ Robins, Atulya Sarin, Ajai Singh, and seminar participants at Iowa State University, Santa Clara University, Seattle University, Temple University, Texas A&M University, the University of New Orleans, the 1996 Western Finance Association meetings and the 1998 Financial Management Association meetings for their comments on an earlier version of the paper. We thank Srini Krishnamurthy for providing us some of the equity issues data. We also thank I/B/E/S International, Inc., for providing us earnings forecast data as part of an academic program to encourage earnings expectations research. We are especially grateful to Scott Lee, an anonymous referee, and G. William Schwert (the editor) for suggestions that have improved the paper substantially. All errors remain our responsibility.0304-405X/99/$ -see front matter 1999 Elsevier Science S.A. All rights reserved. PII: S 0 3 0 4 -4 0 5 X ( 9 9 ) 0 0 0 1 7 -3 these "rms mitigate information asymmetry before approaching the capital market for funds.1999 Elsevier Science S.A. All rights reserved.JEL classixcation: G34; D82

We empirically analyze the information hypothesis that the separation of a "rm's divisions into independently traded units through a spin-o! enhances value because it mitigates information asymmetry about the "rm. Consistent with this hypothesis, we "nd that "rms that engage in spin-o!s have higher levels of information asymmetry compared to their industry and size matched counterparts and the information problems decrease signi"cantly after the spin-o!. The gains around spin-o!s are positively related to the degree of information asymmetry, and this relation is more pronounced for "rms with fewer negative synergies between divisions. Finally, "rms with higher growth opportunities and "rms in need of external capital show a higher propensity to engage in spin-o!s. They also raise more capital following a spin-o!, which is consistent with the view that * Corresponding author. Tel.: #1-504-280-6488; fax: #1-504-280-6397.E-mail address: skrishn1@uno.edu (S. Krishnaswami) ଝWe thank Je!rey Allen, John Bizjak, Peter Brous, Rick Carter, Arnold Cowan, Dave Denis, Dave Ellis, Don Fraser, Steven Pottier, Russ Robins, Atulya Sarin, Ajai Singh, and seminar participants at Iowa State University, Santa Clara University, Seattle University, Temple University, Texas A&M University, the University of New Orleans, the 1996 Western Finance Association meetings and the 1998 Financial Management Association meetings for their comments on an earlier version of the paper. We thank Srini Krishnamurthy for providing us some of the equity issues data. We also thank I/B/E/S International, Inc., for providing us earnings forecast data as part of an academic program to encourage earnings expectations research. We are especially grateful to Scott Lee, an anonymous referee, and G. William Schwert (the editor) for suggestions that have improved the paper substantially. All errors remain our responsibility.0304-405X/99/$ -see front matter 1999 Elsevier Science S.A. All rights reserved. PII: S 0 3 0 4 -4 0 5 X ( 9 9 ) 0 0 0 1 7 -3 these "rms mitigate information asymmetry before approaching the capital market for funds.1999 Elsevier Science S.A. All rights reserved.JEL classixcation: G34; D82

No abstract

We analyze whether the organizational structure of firms (i.e., whether a firm is diversified or focused) affects their cash holdings. Using Compustat firm level and segment-level data, we find that diversified firms hold significantly less cash than their focused counterparts. Our results are robust to industry adjustments at the segment level and to different factors previously found to be important determinants of cash holdings. Using time-series, crosssectional, and additional robustness tests we are able to attribute the lower cash holdings among diversified firms to complementary growth opportunities across the different segments of these firms and the availability of active internal capital markets. We find that the other theories that rely on the potentially effective use of asset sales of non-core segments of diversified firms to generate cash, and the increased agency/influence costs in diversified firms do not offer an economically significant explanation for the lower cash holdings among diversified firms.