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Institutional trading, information production, and corporate spin-offs

Thomas Chemmanur and Shan He

Journal of Corporate Finance, 2016, vol. 38, issue C, 54-76

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.

Keywords: Institutional investors; Institutional trading; Information production; Corporate spin-offs (search for similar items in EconPapers)
JEL-codes: G14 G32 G34 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1016/j.jcorpfin.2016.03.009

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