Investor Disagreement on Corporate Spin-offs News

This study analyzes temporal trading volume surge associated with a firm\u27s public announcement of its spinoff divesture. Combining Miller\u27s (1977) static difference-of-opinion (DO) model with Banerjee and Kremer\u27s (2010) dynamic DO model, this study investigates the effects of investors\u27 differential interpretations of spinoff announcements on price changes for 221 corporate spinoffs in the U.S from 1964 to 2005. We measure the ex-ante level of DO as the degree of DO about a firm\u27s value in a typical trading day prior to a spinoff announcement, and the event level of DO as the changed level of DO triggered by investors\u27 differential interpretations of its spinoff announcement. We find that spinoff announcements spark a sudden and sharp increase in the level of DO. This increase is positively correlated with abnormal returns generated by the announcements. Consistent with the notion of investors\u27 limited attention, the ex-ante level of DO is negatively related to disagreement shock. Further, defining the ex-ante level of DO as disagreement factor, we validate its statistical significance after controlling for other known determinants for these returns in the entire study period. For the first study period between 1964 and 1991, we confirm the results of prior studies on the effects of a change in industrial focus and the relative size of a spun-off on the abnormal returns. For the second study period from 1992 to 2005, all these factors are found insignificant. Only variable that consistently accounts for the cross-sectional variation in the abnormal returns is disagreement factor