Sell-Side Analysts and Legacy Spinoffs
Description
This paper investigates how well analysts do at evaluating spinoffs of legacy businesses vis-à-vis other spinoffs. Analysts appear to be far more conservative in the earnings forecasts they make for legacy businesses and their parents than they are for their non-legacy counterparts. This finding suggests that information asymmetry may have been higher in firms that planned to spin off their legacy businesses, which may have been an important motivation for their decision to undertake this strategy in the first place. Furthermore, following the completion of the spinoffs analyzed in this paper, earnings forecasts become much less conservative for spun-off legacy businesses and their former parents, whereas there is no such change for non-legacy parents and their spun-off subsidiaries. This indicates that spinning off legacy businesses may have helped firms clarify the way in which they were perceived in the market.