Information Asymmetry, Valuation, and the Corporate Spin-off Decision

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

The Relationship between Information Asymmetry and the Quality of Audit: An Empirical Study in Istanbul Stock Exchange

“…This can be measured by liability ratio. The ratio of short-term liabilities plus long-term liabilities to total assets refers to liability ratio (Krishnaswami & Subramaniam, 1999). The need of an enterprise for external borrowing gives rise to voluntary disclosures.…”

Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin‐Offs*

“…However, panel B shows that, despite these incentives, banks, the institutions facing the most restrictive fiduciary standards, significantly reduce their mean holdings in the combined firm immediately following 6. One explanation for this increase could be the fact that firms that engage in spin-offs tend to be high-growth firms (Krishnaswami and Subramaniam 1999) and that institutional investors are increasing the ownership in the firms as they become larger over this period. Such changes would not necessarily be captured by the average adjustment for changes in holdings described below.…”

Economic consequences of public oversight of the auditing profession

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