Firm diversification and asymmetric information: evidence from analysts' forecasts and earnings announcements

Informed Investors and the Internet

“…Specifically, we find that volatility is positively correlated with forecast errors, and that firms with more intangible assets appear to have more accurate analysts' forecasts, as evidenced by the negative and significant coefficient of Intangible. This latter result is similar to the findings of Thomas (2002). Similar to intangibles, the market to book ratio is also negatively correlated with forecast errors.…”

“…Thus, firms with higher volatility are expected to have larger forecast errors and less agreement across analysts. Similar to Alford and Berger (1999) and Thomas (2002), we define Excess volatility as the standard deviation of the excess return (equity's return minus value-weighted return) over the period from 210 to 11 days before an announcement day. 14 Next, even though our sample includes only DJI firms, the size of the firm may have an impact on forecasting ability, and may increase forecast accuracy and reduce forecast dispersion (e.g., Atiase, 1985).…”

Inefficient Investment and the Diversification Discount: Evidence from Corporate Asset Purchases

“…Table 2 also reports sample statistics by firm type. Compared to single-segment buyers, the multiple-segment buyers in our sample are significantly larger (measured by book value of assets or sales) and have significantly more leverage, similar to findings in Berger and Ofek (1995), Hadlock et al (2001), Thomas (2002) and Chen (2006). Focused buyers tend to have better growth options in their investment opportunity sets, consistent with Wernerfelt and Montgomery (1988), Lang and Stulz (1994), Servaes (1996), Hyland and Diltz (2002) and Ahn and Denis (2004).…”

“…The role of the inefficient investment hypothesis in explaining changes in the diversification discount surrounding corporate expansion, such as asset purchases, has so far escaped the attention of researchers. Asset acquisition is an important corporate expansion strategy, which is motivated by either efficiency concerns (Sicherman and Pettway, 1987;Maksimovic andPhillips, 2001 and2002;Warusawitharana, 2008;and Ray and Warusawitharana, 2009) or managerial self-interest (Jensen, 1986;Lang et al, 1991;and Freund et al, 2003). 2 Previous studies indicate that asset acquisitions facilitate asset buyers' efficiency (Warusawitharana, 2008), but this effect may not exist when there are severe agency problems (Freund et al, 2003).…”

Divisional Informativeness Gap and Value Creation from Asset Sales

“…The underlying reason for selecting this variable as a proxy of the noise in the cash-flow informativeness is as follows: higher RMSE of a regression indicates a lower explanation power of earning surprise in explaining the corresponding earning announcement abnormal return, suggesting lower information quality of the announced earnings.In addition, we have followed previous studies, which have used the earning response coefficient as a proxy of the cash-flow informativeness of the firm (Krishnaswami we are able to circumvent endogeneity problem that affects the relation between market reaction to asset sale announcement and information quality of the firm. and Subramaniam, 1999;Hackenbrack and Hogan, 2002;Thomas, 2002;Lennox and Park, 2006;Dellavigna and Pollet, 2009). 7…”