Information asymmetry, valuation, and the corporate spin-off decision

We empirically analyze the information hypothesis that the separation of a firm's divisions into independently traded units through a spin-off enhance s value because it mitigates information asymmetry about the firm. Consiste nt with this hypothesis, we find that firms that engage in spin-offs have h igher levels of information asymmetry compared to their industry and size m atched counterparts and the information problems decrease significantly aft er the spin-off. The gains around spin-offs are positively related to the d egree of information asymmetry, and this relation is more pronounced for fi rms with fewer negative synergies between divisions. Finally, firms with hi gher growth opportunities and firms in need of external capital show a high er propensity to engage in spin-offs. They also raise more capital followin g a spin-off, which is consistent with the view that these firms mitigate i nformation asymmetry before approaching the capital market for funds. (C) 1 999 Elsevier Science S.A. All rights reserved.