Information Asymmetry in Spinoffs: The Role of Incremental Disclosure

53 Pages Posted: 13 Aug 2018 Last revised: 13 Jul 2019

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Feng Guo

Iowa State University - Department of Accounting and Finance

Zac Wiebe

University of Arkansas - Sam M. Walton College of Business

Date Written: July 11, 2019

Abstract

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

Campbell, John L. and Ettredge, Michael L. and Guo, Feng and Wiebe, Zac, Information Asymmetry in Spinoffs: The Role of Incremental Disclosure (July 11, 2019). Available at SSRN: https://ssrn.com/abstract=3220724 or http://dx.doi.org/10.2139/ssrn.3220724

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Michael L. Ettredge

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Zac Wiebe

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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