Abstract
We examine the effect of corporate spinoffs on the trading environment of the stock of firms that spinoff units. Spinoffs change the information environment of firms. The increased precision and quantity of information will change the relative advantage of informed traders. Consistent with increased information incorporation, residual return variance increases following spinoffs. Transaction costs and the price impact of trades are also higher in the quarter following spinoffs. These results are stronger for spinoffs where parent firms divest unrelated subsidiaries. Changes in the information environment associated with spinoffs appear to benefits informed traders at the expense of uninformed traders.
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