Information Asymmetry in Spinoffs: The Role of Incremental Disclosure
54 Pages Posted: 13 Aug 2018 Last revised: 29 Sep 2019
Date Written: September 26, 2019
Prior research argues that one reason firms engage in corporate spinoffs is to increase firm value by reducing information asymmetry with shareholders (the “information hypothesis”). However, the literature has yet to identify a mechanism through which this reduction in information asymmetry occurs. We argue that incremental disclosure in 10-K filings is one mechanism by which spinoffs reduce information asymmetry. Using text re-use detection software to compare the initial 10-Ks of spun-off firms to the 10-Ks of pre-spinoff combined entities, we predict and find a positive association between pre-spinoff information asymmetry and incremental post-spinoff disclosure. However, these results are driven by cross-industry spinoffs that are likely to be operationally motivated. Taken together, these results suggest that the “information hypothesis” does not appear to have standalone merit, in that information-motivated spinoffs do not appear to occur in the absence of operational motives. Finally, we examine consequences of innovation in disclosure following spinoffs and find that incremental disclosure is indeed associated with decreases in information asymmetry and increases in firm value. Overall, we find that 10-K disclosures are a mechanism by which spinoffs reduce information asymmetry, but that reducing information asymmetry does not appear to be the sole motivation for these transactions.
Keywords: spinoff, spin-off, information asymmetry, disclosure
JEL Classification: G30, G34, G14
Suggested Citation: Suggested Citation