Corporate Break-ups and Information Asymmetry: A Market-Microstructure Analysis

59 Pages Posted: 5 Mar 2007

See all articles by Florian Bardong

Florian Bardong

BlackRock

Söhnke M. Bartram

University of Warwick; Centre for Economic Policy Research (CEPR)

Pradeep K. Yadav

University of Oklahoma Price College of Business

Date Written: March 1, 2007

Abstract

The major contribution of this paper is to utilise the direct measures of informed trading and information asymmetry developed in the market microstructure literature to provide rich insights into how the information environment changes during and after a corporate break-up. The paper analyses all corporate break-ups over the eleven-year period 1995-2005. We find that the information asymmetry faced by investors reduces significantly as a result of the break-up. However, this reduction takes place not at the time of the announcement or its "completion", but after it has been fully consummated. We also find that not all informed investors are equally affected. In particular, informed investors who generate their information advantage by skilled processing of market-wide information, become more important relative to the traditional insider with private firm-specific information. This potentially explains why financial advisors promote break-ups among their corporate clients as they are likely beneficiaries. Finally, we find that the positive stock-market reaction to break-up announcements is significantly related to reductions in information asymmetry. Given the extant evidence of information asymmetry being a priced risk factor, this finding helps to reconcile some of the existing explanations for corporate break-ups.

Keywords: Spin-off, Divestiture, Information asymmetry

JEL Classification: G14, G34

Suggested Citation

Bardong, Florian and Bartram, Söhnke M. and Yadav, Pradeep K., Corporate Break-ups and Information Asymmetry: A Market-Microstructure Analysis (March 1, 2007). WBS Finance Group Research Paper No. 77, Available at SSRN: https://ssrn.com/abstract=966301 or http://dx.doi.org/10.2139/ssrn.966301

Florian Bardong

BlackRock ( email )

London
United Kingdom

Söhnke M. Bartram

University of Warwick ( email )

Warwick Business School
Finance Group
Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Pradeep K. Yadav (Contact Author)

University of Oklahoma Price College of Business ( email )

307 W.Brooks, Room 3270 Division of Finance
Norman, OK 73019
United States
4053255591 (Phone)
4053255491 (Fax)

HOME PAGE: http://www.ou.edu/price/finance/faculty/pradeep_yadav.html

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