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Institutional trading, information production, and corporate spin-offs

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  • Chemmanur, Thomas J.
  • He, Shan

Abstract

We use a large sample of transaction-level institutional trading data to analyze, for the first time in the literature, the role of institutional investors as producers of information around corporate spin-offs. Our results may be summarized as follows. First, there is a significant imbalance in post-spin-off institutional trading between the equity of new parent firms versus subsidiaries, suggesting that spin-offs increase institutional investors' welfare by relaxing a trading constraint. This imbalance in institutional trading is driven by differences in information asymmetry across the two spun-off firm divisions. Second, institutional trading around spin-offs has significant predictive power for the announcement effect of a spin-off and for post-spin-off long-run stock returns. Third, institutional investors are able to realize significant abnormal profits by trading in the subsidiary firm equity in the first quarter post-spin-off. Overall, we show that spin-offs enhance information production by institutional investors, who profit from this enhanced information production.

Suggested Citation

  • Chemmanur, Thomas J. & He, Shan, 2016. "Institutional trading, information production, and corporate spin-offs," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 54-76.
    • Handle: RePEc:eee:corfin:v:38:y:2016:i:c:p:54-76
    DOI: 10.1016/j.jcorpfin.2016.03.009
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    Cited by:

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    3. Do, Hung X. & Nguyen, Lily & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "LGBT policy, investor trading behavior, and return comovement," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 457-483.
    4. Hu, Gang & Jo, Koren M. & Wang, Yi Alex & Xie, Jing, 2018. "Institutional trading and Abel Noser data," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 143-167.
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    6. Ryan P. McDonough, 2023. "Corporate communication and shareholder base retention: evidence from spin-offs," Review of Quantitative Finance and Accounting, Springer, vol. 60(4), pages 1283-1327, May.

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    More about this item

    Keywords

    Institutional investors; Institutional trading; Information production; Corporate spin-offs;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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