Differences of Opinion and Stock Prices: Evidence from Spin-Offs and Mergers

Abstract

I use the setting of corporate spin-offs to identify the impact of differences of opinion on stock prices. Based on a formalization of Miller (1977)'s hypothesis, and using data on investor holdings, I construct a novel measure of differences of opinion about the individual values of the components being separated. As predicted, higher disagreement is related to a significantly more positive event return. Importantly, since I focus on ex date returns, these findings are unrelated to the expected business impacts of the transactions, which should be incorporated in prices before the ex date. Placebo tests using only the expected component of my disagreement measure provide additional support that my tests are valid and that other factors that may be correlated with differences of opinion are not driving the results. Additional tests using mergers provide consistent results, and altogether these findings also provide new insight into the attribution of value created in these transactions.