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Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin-Offs

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  • Jeffery S. Abarbanell

    (University of North Carolina)

  • Brian J. Bushee

    (University of Pennsylvania)

  • Jana Smith Raedy

    (University of North Carolina)

Abstract

Corporate spin-offs create new firms with characteristics markedly different from the original firm. Consequently, institutional investors precommitted to certain investment styles or subject to fiduciary restrictions have incentives to rebalance their portfolios at the time of the spin-off. We find strong evidence that investment strategy and fiduciary restrictions affect institutional investor demand for stocks after spin-offs. However, contrary to prior research conjecturing that trading related to investor preferences creates short-term price pressure in entities emerging from spin-off transactions, we find that, in general, this trading is not associated with abnormal price movements for parents or subsidiaries around the spin-off.

Suggested Citation

  • Jeffery S. Abarbanell & Brian J. Bushee & Jana Smith Raedy, 2003. "Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin-Offs," The Journal of Business, University of Chicago Press, vol. 76(2), pages 233-262, April.
  • Handle: RePEc:ucp:jnlbus:v:76:y:2003:i:2:p:233-262
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    Citations

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    Cited by:

    1. Harris, Oneil & Glegg, Charmaine, 2008. "The wealth effects of cross-border spinoffs," Journal of Multinational Financial Management, Elsevier, vol. 18(5), pages 461-476, December.
    2. Juan Wang, 2011. "Transient institutional investors and insider trading signals," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 19(2), pages 118-145, June.
    3. Tai, Vivian W. & Lai, Yi-Hsun & Lin, Lin, 2014. "Local institutional shareholders and corporate hedging policies," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 287-312.
    4. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
    5. Bardong, Florian & Bartram, Söhnke M. & Yadav, Pradeep K., 2006. "The Effect of Corporate Break-ups on Information Asymmetry: A Market Microstructure Analysis," MPRA Paper 13155, University Library of Munich, Germany, revised 26 Oct 2008.
    6. Sikes, Stephanie A., 2014. "The turn-of-the-year effect and tax-loss-selling by institutional investors," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 22-42.
    7. Emilie R. Feldman, 2016. "Corporate spinoffs and analysts' coverage decisions: The implications for diversified firms," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1196-1219, July.
    8. Jared DeLisle, R. & Morscheck, J.D. & Nofsinger, John R., 2014. "Share repurchases and institutional supply," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 216-230.
    9. Patro, Sukesh, 2008. "The evolution of ownership structure of corporate spin-offs," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 596-613, December.
    10. repec:eee:corfin:v:48:y:2018:i:c:p:187-216 is not listed on IDEAS
    11. repec:spr:epolin:v:45:y:2018:i:2:d:10.1007_s40812-017-0072-y is not listed on IDEAS
    12. Burch, Timothy R. & Nanda, Vikram & Silveri, Sabatino, 2012. "Taking stock or cashing in? Shareholder style preferences, premiums and the method of payment," Journal of Empirical Finance, Elsevier, vol. 19(4), pages 558-582.
    13. repec:eee:quaeco:v:64:y:2017:i:c:p:152-161 is not listed on IDEAS
    14. repec:bla:stratm:v:38:y:2017:i:5:p:1151-1173 is not listed on IDEAS
    15. Jiang Cheng & Elyas Elyasiani & Jingyi (Jane) Jia, 2011. "Institutional Ownership Stability and Risk Taking: Evidence from the Life-Health Insurance Industry," NFI Working Papers 2011-WP-14, Indiana State University, Scott College of Business, Networks Financial Institute.
    16. 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.
    17. Jay Wang, Z. & Nanda, Vikram, 2011. "Payout policies and closed-end fund discounts: Signaling, agency costs, and the role of institutional investors," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 589-619, October.
    18. Harris, Oneil & Madura, Jeff, 2010. "Cause and effects of poison pill adoptions by spinoff units," Journal of Economics and Business, Elsevier, vol. 62(4), pages 307-330, July.

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