Working Paper | HBS Working Paper Series | 2010

When Do Analysts Add Value? Evidence from Corporate Spinoffs

by Emilie Rose Feldman, Stuart Gilson and Belen Villalonga

Abstract

We investigate the information content and forecast accuracy of 1,793 analyst reports written around 62 spinoffs—a setting in which analysts' ability to inform investors is potentially very high. We find that analysts pay little attention to subsidiaries about to be spun off even though these subsidiaries constitute a significant part of the parent company operations. Moreover, while the level of detail in analyst research about parent companies is significantly related to EPS and price forecast accuracy, the same is not true for the subsidiaries. We establish that this "forgotten child" phenomenon is linked to a "neglected parent" effect, whereby inaccuracy in subsidiary earnings forecasts is associated with inaccuracy in parent estimates. We conclude by showing that spinoffs may be a particularly complex setting for analysts to evaluate relative to other forms of corporate restructuring, such as IPOs, mergers, or bankruptcies, providing one potential explanation for our findings.

Keywords: Earnings Management; Mergers and Acquisitions; Business Subsidiaries; Restructuring; Forecasting and Prediction; Insolvency and Bankruptcy; Initial Public Offering; Price; Reports; Research;

Citation:

Feldman, Emilie Rose, Stuart Gilson, and Belen Villalonga. "When Do Analysts Add Value? Evidence from Corporate Spinoffs." Harvard Business School Working Paper, No. 10-102, May 2010.