Asymmetric Information And Conglomerate Discount: Evidence From Spinoffs

The existing literature argues that diversified firms may be undervalued due to information asymmetry between a firm's management and the market. Splitting the firm's divisions into multiple business components will facilitate the market valuation of each component more accurately. The authors investigate the information hypothesis from corporate spinoffs from 1981 through 2004. They use the post spinoff data to reconstruct the diversified firm, assess the improvement in value at the combined firm level, and relate the value improvement to the change in the level of information asymmetry.