Intra-Shift Information Costs: Transition Services Agreements in Corporate Spinoffs

Abstract

In this study, we introduce the concept of intra-shift information costs, defined as the costs that market participants incur of acquiring and processing information about a company during (as opposed to before or after) a governance shift from hierarchy to market. We investigate the role that voluntary disclosure plays in reducing intra-shift information costs, as well as the equity market implications thereof. Building on prior work characterizing corporate spinoffs as a shift from hierarchy to market, we find that voluntary disclosure during such governance shifts is beneficial for equity market performance, and that this benefit is pronounced when disclosure increases the information that is available to investors and when it reduces their cost of assimilating that information. These findings contribute to the literatures on corporate strategy, transaction cost economics, information asymmetry, and voluntary disclosure.