The Impact of Spinoffs on the Information Environment of Peer Firms: Information Spillovers or Industry Disruption

Abstract

Spinoffs are a form of divestiture in which a parent firm separates a portion of its operations into a newly created and independent spinoff firm. This thesis examines how spinoffs affect the information environment of the parent firm’s peers using a sample of U.S. spinoffs from 2010 to 2018. I find that analyst forecast dispersion decreases for peers after a cross-industry spinoff. This result is more pronounced when the parent firm is operationally complex prior to the spinoff, suggesting that the separation of unrelated operations can reduce analysts’ information processing costs and facilitate information spillovers between peers. Conversely, I find that forecast accuracy decreases and forecast dispersion increases for peers after a same-industry spinoff. These results are more pronounced for peers that operate in industries that become less concentrated and peers that experience more volatile cash flows and income in the post-spinoff period. Together, these results suggest that same-industry spinoffs can be disruptive industry events that change industry compositions and outweigh the potential informational benefits of the spinoff firm’s initial financial statements, thereby complicating the forecasting process for analysts. Overall, this thesis identifies new mechanisms that helps explain the spillover effects of spinoffs on the information environment of the parent firm’s peers and demonstrates that the operational similarity between the parent and spinoff firms is an important determinant of these effects.