Does Transparency Create Value? The Relationship between an Increased Transparency for Analysts and Value Creation Conveyed by Spin-Offs

Abstract

In literature extensive evidence is provided for the value creation by spin-offs on both the short and long term. Nevertheless no consensus can be found on the sources of this value creation. Research of Gilson et al. (1997) find that firms experience improvements in the quality of analyst coverage around spin-offs. This can be seen as an increase of transparency for analysts. Anslinger et al. (1999) suggest this increased transparency for analysts could unlock hidden value. This research provides a unique contribution to literature by closely examining the relationship between the increase of transparency for analysts and value creation conveyed by spin-offs. The sample in this research consists of 67 US parent companies that conducted a spin-off in the period 1996-2006. The results give statistically significant evidence for (1) improved analyst coverage and forecasting performance through an increase in transparency, (2) abnormal returns following spin-offs on both the short and long term, and (3) evidence for a positive relationship between the increased transparency and abnormal returns. In existing literature the implications of this relationship has not yet been examined in quantitative terms until now. This report demonstrates for the first time factual support for the existence of this relationship.