Three essays on corporate restructuring
Date of Issue2009
College of Business (Nanyang Business School)
The dissertation consists of three essays on corporate refocusing. The first essay (Asymmetric Information and Conglomerate Discount: Evidence from Spinoffs) investigates the information hypothesis using corporate spinoffs from 1981 through 2004. We 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. We find that, prior to the spinoff, the sample firms have significantly higher levels of information asymmetry than their industry- and size-matched peers and the level of information asymmetry decreases slightly following the spinoff. We also find that the sample firms are valued at a substantial discount before the spinoff and the valuation discount is eliminated after the completion of the spinoff. The matching firms, however, do not trade a significant discount either pre- or post-spinoff, which is consistent with the view that only undervalued firms divest. More importantly, we find that the change in excess value around the spinoff is significantly and negatively related to the change in the level of information asymmetry. We conclude that information asymmetry is at least partly responsible for the diversification discount. The second essay (Corporate Governance and Firm Refocusing) studies a sample of multi-segment firms that choose to decrease the level of diversification through divestitures, tax-free spinoffs, or discontinued operations from 1993 to 2005. We find that, relative to their non-refocusing counterparts that are matched on a wide variety of characteristics, refocusing firms have more effective governance mechanisms such as fewer takeover defenses, smaller boards, more independent nominating committees, greater number of annual meetings, and lower dividend payout ratio, etc. Using multivariate probit analysis and controlling for various governance factors, we find that the G-index (or Gov-10 which is a parsimonious index based on 10 provisions underlying the G-index) and whether a firm has an independent nominating committee appear to have the strongest impacts on its decision to refocus. We also document a significant decrease in the diversification discount and a significantly positive announcement return associated with refocusing. Firms that do refocus experience significantly greater value enhancements than their controls. The results suggest that agency issues are responsible for firms maintaining value-reducing diversification policies. The third essay (Insider Trading and Corporate Spinoffs) examines insider trading before corporate spinoffs. We show a clear and almost monotonic increase (decrease) in the number of insider purchases and net purchases (sales) in the four quarters prior to the spinoff announcement. In addition, relative to the benchmark period, insider selling (net purchasing) is significantly lower (higher) in the three quarters prior to the announcement. We then examine whether insider trading has predictive power for spinoff announcement effects as well as changes in firm performance surrounding spinoffs. We stratify the sample based on insider trading activity within a quarter prior to the announcement day. Spinoffs with positive abnormal insider net purchases are classified as “abnormal net purchase sample” while the others are classified as “abnormal net sale sample”. We find that the announcement period excess returns for the abnormal net purchase group are significantly higher than those for the abnormal net sale group. Moreover, only the firms in the abnormal net purchase subgroup exhibit significant improvements in long-run stock market performance and operating performance around spinoffs. The results suggest that improving firm valuation is an important motive behind corporate spinoffs and it is possible to distinguish the quality of a spinoff firm on the basis of the insider trading behavior before the spinoff announcement.