On the causes of volatility effects of conglomerate breakups |
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| Authors: | Chintal A Desai Robert Savickas |
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| Institution: | 1. Addis Ababa University, Addis Ababa, Ethiopia;2. Westerdals Oslo ACT, Faculty of Technology, Oslo, Norway;3. Brunel University, London, UK;1. Fulton Hall 330, Carroll School of Management, Boston College, Chestnut Hill, MA 02467, USA;2. Business Education Complex 2919, E. J. Ourso College of Business, Louisiana State University, Baton Rouge, LA 70803, USA;1. Nanyang Business School, Nanyang Technological University, Division of Banking and Finance, Singapore 639798, Singapore;2. Business School, University of Adelaide, 10 Pulteney Street, Adelaide 5005, Australia;3. Korea University Business School, Korea University, 145 Anam-ro, Seongbuk-gu, Seoul, Republic of Korea;1. Department of Finance, College of Business, University of Illinois, 515 E Gregory St., Champaign, IL 61820, United States\n;2. Stern School of Business, NYU, 44 W 4th Street, Suite 9-190, New York, NY 10012, United States\n;3. NBER, United States\n |
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| Abstract: | We describe four channels through which breakups can potentially increase idiosyncratic volatility for parent firms. These are: loss of diversification (portfolio effect), change in growth opportunities, change in operational efficiency, and the flow and assimilation of information (information effect). The relevance of each channel depends on the mode of a breakup. We explain conceptually and show empirically, using a sample of 530 breakups (259 spinoffs and 271 equity carveouts), that the portfolio effect is dominant for spinoff parents, while the information effect gains importance for carveout parents. Our novel insight is that the magnitude of the information effect depends on the pre-announcement information set held by investors; we provide a simple state-space model and empirical evidence to support this intuition. We also find a relation between the change in operational efficiency and the change in idiosyncratic volatility for spinoff parents. |
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