Divisional Informativeness Gap and Value Creation from Asset Sales

20 Pages Posted: 17 Oct 2016

See all articles by Chintal A. Desai

Chintal A. Desai

Virginia Commonwealth University (VCU)

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Date Written: November 2016

Abstract

Nanda and Narayanan (1999) show that the information asymmetry between the managers and market participants regarding divisional cash flows helps explain the value creation on asset sales. Based on their theoretical framework, the divisional informativeness gap hypothesis predicts that the announcement‐period return increases with the difference in cash‐flow informativeness of retained and divested divisions prior to the divestiture. Our results, using industry‐average earnings response coefficient as a proxy for cash‐flow informativeness of a division, support this prediction. The effect is stronger when a conglomerate retains the division with relatively greater growth opportunities.

Keywords: asset sales, divestitures, cash‐flow informativeness, corporate restructuring

JEL Classification: G34, G14

Suggested Citation

Desai, Chintal and Gupta, Manu, Divisional Informativeness Gap and Value Creation from Asset Sales (November 2016). Financial Review, Vol. 51, Issue 4, pp. 559-578, 2016, Available at SSRN: https://ssrn.com/abstract=2852620 or http://dx.doi.org/10.1111/fire.12112

Chintal Desai

Virginia Commonwealth University (VCU) ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

Manu Gupta (Contact Author)

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

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