Corporate Break-ups and Information Asymmetry: A Market-Microstructure Analysis
59 Pages Posted: 5 Mar 2007
Date Written: March 1, 2007
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: Suggested Citation