Information Asymmetry in Spinoffs: The Role of Incremental Disclosure
53 Pages Posted: 13 Aug 2018 Last revised: 13 Jul 2019
Date Written: July 11, 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 can reduce information asymmetry. Using text re-use detection software to compare the initial 10-Ks of spun-off firms to the 10-Ks of the pre-spinoff combined entities, we predict and find a positive association between pre-spinoff information asymmetry and the innovation in disclosure that occurs post-spinoff. However, these results are driven by cross-industry spinoffs which 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 occur in the absence of complementary operational motives. In supplemental analyses, we examine the consequences of disclosure innovation in spinoff transactions and find that disclosure innovation is indeed associated with decreases in information asymmetry and increases in firm value. Overall, we provide evidence 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