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

51 Pages Posted: 4 Sep 1998

See all articles by Sudha Krishnaswami

Sudha Krishnaswami

University of New Orleans - College of Business Administration

Venkat Subramaniam

Tulane University

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Abstract

We empirically analyze the information hypothesis that the separation of a firm's divisions into independently traded units through a spin-off is value enhancing because it mitigates information asymmetry about the firm. Consistent with this hypothesis, we find that firms that engage in spin-offs have higher levels of information asymmetry compared to their industry and size matched counterparts and the information problems decrease significantly after the spin-off. The gains around spin-offs are positively related to the degree of information asymmetry, and this relation is more pronounced for firms with less negative synergies between divisions. Finally, firms with higher growth opportunities and firms in need of external capital show a higher propensity to engage in spin-offs. They also raise more capital following a spin-off, which is consistent with the view that these firms mitigate information asymmetry before approaching the capital market for funds.

JEL Classification: G34, D82

Suggested Citation

Krishnaswami, Sudha and Subramaniam, Venkat R., Information Asymmetry, Valuation, and the Corporate Spin-Off Decision. Available at SSRN: https://ssrn.com/abstract=123088 or http://dx.doi.org/10.2139/ssrn.123088

Sudha Krishnaswami (Contact Author)

University of New Orleans - College of Business Administration ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States
504-280-6488 (Phone)
504-280-6397 (Fax)

HOME PAGE: http://www.uno.edu/~skrishna

Venkat R. Subramaniam

Tulane University ( email )

A.B. Freeman School of Business
New Orleans, LA 70118
United States
504-865-5493 (Phone)
504-862-8327 (Fax)

HOME PAGE: http://www.tulane.edu/~vencat

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