The Effect of Investor Disagreement on Wealth Gain from Corporate Spinoff Announcements

This study empirically tests the implication of theories of differences of opinion (DO) model. We extend Kim (2017)’s bivariate analysis of the effect of investor disagreement on stock prices to a multivariate analysis. The prior literature has examined sources for wealth gains generated from spinoff announcements based on the assumption that managers act rationally to maximize the shareholder value. Thus, rational investors react positively to spinoff decisions. However, these motives-value creation through a spinoff by reducing information asymmetry, by focusing on core business, or by splitting up a large portion of assets to a spun-off-at best have limited power to explain wealth gains. Using a sample of corporate spinoff announcements in the U.S, we show that not only because investors have different priors and interpret information differently, but also because they react to the announcement in the manner that is consistent with the idea of limited attention, the disagreement factor, which is defined by such investor behavior account for a significant fraction of the cross-sectional variation in the announcement abnormal returns.