Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs

The existing literature argues that diversified firms may be undervalued due to information asymmetry between a firm’s management and the market. Splitting the firm’s divisions into multiple business components will facilitate the market valuation of each component more accurately. We investigate th...

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Main Authors: Jing, Pan, DING, David K., Charoenwong, C.
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Language:English
Published: Institutional Knowledge at Singapore Management University 2007
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/709
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spelling sg-smu-ink.lkcsb_research-17082010-09-23T06:24:04Z Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs Jing, Pan DING, David K. Charoenwong, C. The existing literature argues that diversified firms may be undervalued due to information asymmetry between a firm’s management and the market. Splitting the firm’s divisions into multiple business components will 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 the level of information asymmetry decreases slightly following the spinoff. We also find that the sample firms are valued at a substantial discount before the spinoff and the valuation discount is eliminated after the completion of the spinoff. The matching firms, however, do not trade a significant discount either pre- or post-spinoff, which 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. 2007-10-17T07:00:00Z text https://ink.library.smu.edu.sg/lkcsb_research/709 Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Finance and Financial Management Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Finance and Financial Management
Portfolio and Security Analysis
spellingShingle Finance and Financial Management
Portfolio and Security Analysis
Jing, Pan
DING, David K.
Charoenwong, C.
Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs
description The existing literature argues that diversified firms may be undervalued due to information asymmetry between a firm’s management and the market. Splitting the firm’s divisions into multiple business components will 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 the level of information asymmetry decreases slightly following the spinoff. We also find that the sample firms are valued at a substantial discount before the spinoff and the valuation discount is eliminated after the completion of the spinoff. The matching firms, however, do not trade a significant discount either pre- or post-spinoff, which 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.
format text
author Jing, Pan
DING, David K.
Charoenwong, C.
author_facet Jing, Pan
DING, David K.
Charoenwong, C.
author_sort Jing, Pan
title Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs
title_short Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs
title_full Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs
title_fullStr Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs
title_full_unstemmed Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs
title_sort asymmetric information and conglomerate discount: evidence from spinoffs
publisher Institutional Knowledge at Singapore Management University
publishDate 2007
url https://ink.library.smu.edu.sg/lkcsb_research/709
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