On the Causes of Volatility Effects of Conglomerate Breakups

49 Pages Posted: 22 Mar 2009 Last revised: 10 May 2010

See all articles by Chintal A. Desai

Chintal A. Desai

Virginia Commonwealth University (VCU)

Robert Savickas

George Washington University - School of Business - Department of Finance

Date Written: May 9, 2010

Abstract

We describe four channels through which breakups can potentially increase idiosyncratic volatility for parent firms. These are: loss of diversification (portfolio effect), change in growth opportunities, change in operational efficiency, and the flow and assimilation of information (information effect). The relevance of each channel depends on the mode of a breakup. We explain conceptually and show empirically, using a sample of 530 breakups (259 spinoffs and 271 equity carveouts), that the portfolio effect is dominant for spinoff parents, while the information effect gains importance for carveout parents. Our novel insight is that the magnitude of the information effect depends on the pre-announcement information set held by investors; we provide a simple state-space model and empirical evidence to support this intuition. We also find a relation between the change in operational efficiency and the change in idiosyncratic volatility for spinoff parents.

Keywords: Conglomerate breakups, Spinoffs, Equity carveouts, Divestitures, Volatility.

JEL Classification: G34, G10

Suggested Citation

Desai, Chintal and Savickas, Robert, On the Causes of Volatility Effects of Conglomerate Breakups (May 9, 2010). Available at SSRN: https://ssrn.com/abstract=1364128 or http://dx.doi.org/10.2139/ssrn.1364128

Chintal Desai

Virginia Commonwealth University (VCU) ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

Robert Savickas (Contact Author)

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

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