Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs

42 Pages Posted: 12 Mar 2008

See all articles by Charlie Charoenwong

Charlie Charoenwong

Nanyang Technological University (NTU)

David K. Ding

Singapore Management University - Lee Kong Chian School of Business

Jing Pan

affiliation not provided to SSRN

Date Written: March 6, 2008

Abstract

The existing literature argues that diversified firms may be undervalued due to the information asymmetry between a firm's management and the market. Splitting the firm's divisions into multiple business components is thought to 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 that the level of information asymmetry decreases to a certain extent following the spinoff. We also find that the sample firms are valued at a substantial discount before the spinoff and that the valuation discount is eliminated after the completion of the spinoff. The matching firms, however, do not trade at a significant discount either pre- or post-spinoff. This 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.

Keywords: asymmetric information, diversified firms, conglomerate discount, spinoff

JEL Classification: G14, G34, D82, G24

Suggested Citation

Charoenwong, Charlie and Ding, David K. and Pan, Jing, Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs (March 6, 2008). Available at SSRN: https://ssrn.com/abstract=1103724 or http://dx.doi.org/10.2139/ssrn.1103724

Charlie Charoenwong

Nanyang Technological University (NTU) ( email )

Nanyang Business School, BF Division
S3-01c-104
Singapore, 639798
Singapore
+65 6790 4799 (Phone)
+65 6791 3697 (Fax)

David K. Ding (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828-0245 (Phone)

Jing Pan

affiliation not provided to SSRN ( email )

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