Spin-Offs and Information

Posted: 22 Aug 1998

See all articles by Michel A. Habib

Michel A. Habib

University of Zurich; Swiss Finance Institute

D. Bruce Johnsen

George Mason University - School of Law; PERC - Property and Environment Research Center

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: No Date

Abstract

This paper provides an explanation for the increase in firm value observed upon spin-off that is based upon the transmission of information about the various assets (or divisions) of a firm from informed to uninformed investors. Spin-offs serve to transmit information from informed to uninformed investors by increasing the number of traded securities, from whose prices uninformed investors can infer part of the private information of informed investors. The additional information made available to uninformed investors improves their estimates of, and decreases their uncertainty about value of the assets of the firm. It thus increases their demand for the securities issued by the firm in the presence of positive information about the value of the assets of the firm, in turn increasing the price of these securities and the value of the firm. The increase in firm value made possible by a spin-off is shown to be related to the amount of trading that follows the spin-off, as uninformed investors increase their total holdings of the various securities. The private information made available to uninformed investors is also made available to managers, who are thereby enabled to make better investment decisions.

JEL Classification: G34

Suggested Citation

Habib, Michel A. and Johnsen, D. Bruce and Naik, Narayan Y., Spin-Offs and Information (No Date ). Available at SSRN: https://ssrn.com/abstract=6918

Michel A. Habib (Contact Author)

University of Zurich ( email )

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HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

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D. Bruce Johnsen

George Mason University - School of Law ( email )

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Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

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Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

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Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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