Corporate spin-offs and financial analyst following

Corporate spin-offs and financial analyst following

University of Groningen

Faculty of Economics and Business

Master Thesis MSc Accountancy and Controlling

Januari 2021

Anton ter Brake

S2950014

Corporate spin-offs and financial analyst following

Abstract: Corporate spin-offs represent a type of divestiture with significant economic impact on a variety of stakeholders. While spin-offs have been found to increase divesting firms’ operational performance and transparency, their effect on financial analyst following has not been explored. In this paper I hypothesize that the parent firms’ financial analyst following is likely to increase given that their simplified structure is likely to be associated with higher forecast accuracy. Also, I hypothesize that, due to the expected increase in performance, the increase in financial analyst following will be incrementally larger in case of a focus increasing spin-off. Furthermore, I argue that the relative size of the spin-off will impact the relationship between a spin-off and financial analyst following negatively; this is because the value of information is higher for larger companies. I draw on a sample of 320 US firms that announced a spin-off between the period 1981 and 2018 to test my expectations. Results show that spin-offs have a negative effect on financial analyst following and that the decrease in analyst following is significantly larger for focus increasing offs compared to non-focus increasing spin-offs. An explanation for this finding is that analyst expect to produce less accurate forecasts due to the spin-off and therefore decide to drop coverage. Furthermore, I find evidence that for larger spin-offs, financial analyst following increases. This would likely be explained by larger spin-offs indicating restructuring efforts which increases the demand for financial analysts. All in all, my study is the first to examine the link between a corporate spin-off and financial analyst following.

Table of Contents

3.4 Moderating variables ... Error! Bookmark not defined. 3.5 Control variables. ... 15

4. Results ... 15

4.1 Descriptive statistics and Pearson correlation matrix ... 16

4.2 Regression analysis ... 16

5. Discussion... 18

5.1 Results ... 19

5.2 Theoretical contribution and managerial implications ... 20

5.3 Limitations and future research. ... 20

6. References ... 22

1. Introduction

A corporate strategy that has been increasing in popularity is to divest part of a unit or division

through a spin-off. Spin-offs can be considered as an important event for its stakeholders as

well as the capital market in general. In 2015, more than $250 billion worth of spinoff

transactions were closed globally (Wachtell, Lipton, Rosen, 2016). A spin-off occurs when a

parent company distributes the number of shares of its subsidiary pro-rata among its

shareholders. Following a spin-off, shareholders can trade in the stock of the separate public

companies, of the parent as well as its subsidiary. There has been done a lot of research

regarding the determinants and effects of spin-offs. One of the main reasons why spin-offs

occur is that they have been found to increase shareholder value because of improvements in

operational performance and abnormal stock market returns (Desai and Jain, 1999; Sudarsanam

and Qian, 2007).

Given the economic significance of spin-offs, in this thesis I will study the effect of spin-offs

on the parent firms’ financial analyst following. The academic literature has long discussed the

value of financial analysts. They have been found to contribute to the efficiency of capital

markets by reducing information asymmetry between managers and investors, generating

financial forecast, stock recommendations and other research that helps investors make better

decisions (Francis and Soffer, 1997; Kelly and Ljungqvist, 2008). Also, financial analysts

affect a firm’s default risk by monitoring managerial actions thereby reducing agency costs

related to the separation of ownership and control (Cheng and Subramanyam, 2008). Firms

earn significant abnormal returns when analysts initiate coverage following the expiration of

the quiet period for their IPOs (Bradley, Jordan and Ritter, 2003). The abnormal returns are

especially large when firms get coverage by multiple analysts. Furthermore, an increase in

financial analyst following has been linked to an increase in the liquidity of a firm’s securities

research, the value of analyst coverage is relatively more limited in specific contexts. This

could be the case when the company is rather complex (Gilson, 2001) or when there is a

mismatch between the area of expertise of the investor and the company (Clement et al., 2007).

In case of a spin-off, financial analysts following could be particularly important. In the

pre-spin-off period, investors could profit from financial analysts since these analysts could inform

investors about how the spin-off will impact both the value of the parent firm as well as the

spun-off firm. Also, financial analysts are especially useful to investors since they might have

been following the company for a longer time period, thus giving them a comparative

advantage in predicting stock prices and future financial performance.

Several studies examine the determinants of analyst following, such as the level of institutional

holdings (Ackert and Athanassakos, 2003); the complexity of a firm (Bricker et al., 2000); the

variability of returns, the correlation between the firms’ return and the market return and firms’

size (Bhushan 1989). Financial analyst following has been found to have a negative association

with the level of insider shareholding and industrial diversification. Yet in the context of a

spin-off it is unclear whether the financial analyst following the parent firm will increase or decrease.

In this thesis, I argue that the number of financial analysts following the parent firm will

increase because of increased trading volumes, improved forecast accuracy and a higher

demand for investment banking services after the spin-off. I also hypothesize that financial

analysts following the parent firm will increase incrementally more for focus increasing

spin-offs relative to non-focus increasing spin-spin-offs because of the expected increase in performance

of the parent firm. Furthermore, I argue that financial analysts following the parent firm will

increase incrementally more for smaller spin-offs because firm size is likely to have a positive

To test my expectations, I draw on a sample of 320 US firms that announced a spin-off between

the period 1981 and 2018. Financial data is obtained from Compustat North America and data

regarding financial analyst following from I/B/E/S. Furthermore, I get spin-off data from SDC

Platinum database. Results indicate that a spin-off is likely to decrease the financial analysts

following the parent firm and that the decrease in analyst following is significantly larger for

focus increasing spin-offs compared to non-focus increasing spin-offs. I find evidence that for

relatively large spin-offs the number of financial analysts following the parent increases.

This paper contributes to the existing spin-off literature (Gilson et al., 2001; Feldman, 2016).

by explaining how financial analysts, which can be considered as a big information

intermediary in capital markets, are impacted by spin-offs. Also, this paper contributes to the

financial analyst literature (Bhushan, 1989; Jeong, 2020;) by finding that spin-off have a

negative effect on financial analyst following. Therefore, my results can contribute to market

participants including firms and investors by understanding the behavior of financial analysts.

The remainder of this study is proceeds as follows: Section 2 presents the literature review and

develops the hypothesis. Section 3 explains the data and the method. Section 4 describes the

2. Theoretical background

2.1 Spin-offs

Between the 1960’s and the 1980’s large conglomerate firms were common and considered to be advantageous because the diversification strategy dominated the corporate landscape

(Leinwand & Mainardi, 2012). However, a potential downside to this is that as firms increase

their lines of operations, they also become more complex to manage. Also, large firms with

different business lines are not only more difficult to manage, investors and financial analysts

become more likely to lose interest because of control and transparency issues (Denis et al.,

2002). In recent decades, capital markets have become more open and accessible, making it

easier for investors and financial analysts to include stocks in their portfolio that is within their

area of competence. It seems that their interest shifted towards companies with a “pure-play” strategy instead of conglomerate stocks.

As discussed in the introduction a spin-off refers to the separation of part of the assets of a

parent company into a new entity. Although the parent company discharges the ownership of

the assets, the ownership is not taken away from shareholders since they receive a pro-rate

distribution of the shares of the spun-off firm. Spin-offs create uncertainty for its stakeholders

and are typically complex events in which a lot of factors must be taken into account.

Spin-offs mainly occur because they are considered to be value increasing by its management and

shareholders in case the companies are owned and managed separately. There are multiple

reasons that can be found in the literature for why spin-offs are beneficial for a company. Two

key drivers for spin-offs are relevant for this paper, namely the need for a more focus increasing

strategy and the need for companies to reduce information asymmetry between firm’s

management and the external capital market.

The reason that is most often discussed in the literature for conducting a spin-off is the intention

the abnormal returns for the focus increasing spin-offs are typically larger compared to the

non-focus increasing spin-offs. A spin-off is typically considered as a non-focus increasing spin-off in

case the parent company has a different two-digit Standard Industry Classification (SIC) code

compared to the spun-off entity. In this study I will also consider whether there is a difference

in the financial analysts following the parent firm after a focus-increasing spin-off compared

to a non-focus increasing spin-off.

Secondly, firm’s spin-off part of its entity because there is an information asymmetry between

the management of the firm and the external capital market (Krishnaswami and Subramiam,

1999). The overdiversified firm leads to more information asymmetry compared to when the

entity would partly be spun-off. Information asymmetry can lead to undervaluation of parts of

the business which in the ends lead to a lower firm value of the overdiversified firm (Hughes,

Liu, Liu, 2007). Following Zuckerman (2000), information asymmetry explains how a lack of

endorsement by industry specialists of a firm’s identity is likely to be a significant factor leading to de-diversification. Firms feel greater pressure to realign their industrial participation

with the financial analysts their specialties in case of a mismatch between the corporate identity

and the area of expertise of the financial analysts.

2.2 Stakeholder theory

Stakeholders are the people and organization’s that don’t necessarily have direct economic interest in a company but do have interest in the activities that the company undertakes.

Stakeholders can be different interest groups such as employees, suppliers, consumers and

others. Stakeholder theory argues that managers should make decisions based on the interest

of all the stakeholders in a firm. Stakeholder theory encourages the effective management of

stakeholders by meeting their needs (Freeman, 2010). The stakeholder theory further argues

that firms should utilize best possible strategies to resolve any differences in interest between

stakeholder group who specialize in making evaluations and recommendations about the firms

they follow. Stakeholders can influence organizations or are being influenced by the

achievement of an organization’s objectives (Freeman, 2010). Stakeholder theory therefore can potentially explain as to why companies decide to spin-off part of its assets because they are

pressured by financial analysts to do so. An example hereby is the quote from Keith Bailey,

the chief executive of Williams Corporation. He described the reason to spin-off WilTel by

Williams Co. as motivated by a desire to make the company “easier for stock researchers to follow” (Zuckerman, 1999). Another example is the spin-off of URS Corporation of its training subsidiary from its engineering consulting operations. According to the CEO, URS had to

change its corporate strategy because it could not answer the question that was often asked by brokerage houses: What kind of analyst should we assign to cover you?” The neglect of coverage of a firm by financial analysts could lead to shares trading at a discount as found by

Zuckerman (1999).

2.3 Hypothesis development

In my paper I argue that spin-offs are likely to impact the financial analyst following the parent

firm. Whether the financial analyst following the parent will increase or decrease is dependent

on the benefits and costs that a spin-off induces on the financial analysts. A spin-off on one

hand could lead to a lower number of financial analysts following the parent company. Due to

the spin-off, the financial analysts might produce relatively less accurate forecasts about the

parent company because spin-offs generally change the composition of industries in which the

parent and subsidiary participate in. Consequently, some financial analysts might decide to

drop coverage of the parent company since inaccurate forecasts have been linked to decreased

career opportunities, a higher likelihood to lose the job, or having to switch to lower-reputation

banks (Hong, Kubik, and Solomon, 2000). As the parent firm’s strategy and its industry

it more likely that the number of financial analysts following the parent company will decrease.

In the event of a spin-off, financial analysts could thus be deterred and therefore decide to drop

coverage.

One could also argue that the financial analyst following will increase after a spin-off. In the

literature there is evidence that the trading volume of a firm increases after a spinoff

(Abarbanell, Bushee, and Raedy, 2003; Gilson et al., 2001). Groysberg et al. (2012) and Healy

et al. (2011) discuss furthermore how analyst compensation is linked to trading volume and to

their ability to be able to generate revenues for investments banks. You would therefore expect

that after a spin-off, the amount of financial analyst following the parent firm, will increase

because of the higher trading volume of the firm’s stock. Also, the demand for financial analyst

by investors is likely to increase in case of a spin-off. Analyst could explain to the investors

how the spin-off will impact the value of the parent firm as well as the spun-off firm. Financial

analysts can help them predict the stock price and future financial performance after the

spin-off since they have a lot of knowledge about the firm. Furthermore, additional to the increased

demand effects for financial analysts, the number of financial analysts willing to cover the

spin-off firms is likely to increase. The reason for this is that the research costs of financial analysts

is likely to decrease due to the increased amount of information that is available on the

post-breakup firms (Bhushan, 1989). Also, the increased availability of information that is available

can lead to better forecast accuracy. Bhushan (1989) and Litov, Moreton and Zenger (2012)

discuss in their papers that analysts are rewarded based on the accuracy of their forecasts.

Analysts are generally not paid directly by the investors but are compensated by their

employers because of their ability to produce accurate forecast which investors use for their

decision making (Gilson et al., 2001). Furthermore, spin-offs are often part of other deals like

mergers and acquisitions, alliances and divestitures (Capron Dussauge and Mitchell, 1998),

Thus, while spin-offs could potentially have a negative impact on the forecast accuracy of

financial analyst, thereby reducing the number of financial analysts following the firm, the

effects could potentially be offset by the factors discussed in the paragraph above. Therefore,

the following hypotheses is put forth:

Hypothesis 1: Financial analyst following the parent firm will increase after a spin-off. I expect that different results will occur for a focus increasing spin-off compared to a non-focus

increasing spin-off. The reason for this is that the increase in trading volume is often fueled by

expected improvements in performance because of the “focus stock” that has been created.

Secondly, the demand for investment banking funding is likely to increase because the ability

for the diversified firms to act as an internal capital market has been reduced (Gertner,

Powers,and Scharfstein, 2002). The parent firm therefore relies more on external financing

after a spin-off (Krishnaswami and Subramaniam, 1998) which increases the demand for

investment banking in order to attract additional capital.

Hypothesis 2: The post-spinoff financial analyst following of the parent firm will increase incrementally more for focus increasing spin-offs relative to non-focus increasing spin-offs. Furthermore, another variable that comes into play when considering the effect of a spin-off

on the financial analyst following, is the relative size of the spinoff. The demand for analyst

services is likely to be dependent on the firm size. Investors are likely to value private

information about larger firms more compared to smaller firms. The reason for this is that the

earnings that the investor can generate for a larger firm are relatively higher compared to the

earnings of smaller firms. The benefits from getting information is thus an increasing function

of firm size, which means that for larger firms, the demand for financial analyst would be

higher. Also, the supply of financial analyst is likely to be influenced by the size of the firm.

investment banks and brokerage houses. Analysts have incentives to focus on larger companies

because these companies are more widely held and stimulate the interest of large number of

investors with more potential transactions. A larger firm size means more transactions business

for the analyst, which thus lowers the cost of proving analyst services and therefore increases

the aggregate supply of financial analysts. A spin-off that is larger in size would effectively

reduce the size of the parent company. Based on the arguments mentioned the following

hypothesis is put forth:

Hypothesis 3: The post-spinoff financial analyst following the parent firm will increase incrementally more for smaller spin-offs.

3. Methodology

3.1 Data

Data is obtained from different data sources. Data regarding spin-offs is obtained from the SDC

Platinum base. The sample consist of 773 unique spin-offs that have been completed between

1981 and 2018. Financial information is downloaded from Compustat North America between

the period 1979 and 2020. This included 466,269 firm-year observations. Data related to

analyst following is gathered from I/B/E/S summary history file which resulted in 198,319

firm-year observations. Continuous variables are winsorized at 1% and 99% in order to deal

with outliers. After merging the datasets and removing incomplete observations, the total

sample is reduced to 4,383 observations with complete data to test hypothesis 1. The sample

used to test hypothesis 2 and 3 is further reduced because of missing values in the independent

variables. The construction of the dataset is displayed in Table 1.

[Insert table 1]

3.2 Dependent variable

To test my hypotheses, I used NumAF as dependent variable. NumAF is defined as the number

of financial analysts following a specific company in a given year. The variable is calculated

as the average amount of financial analysts throughout the year that make earnings forecast for

the next fiscal year ending. See Table 2 for the descriptions of all the variables used in this

study.

[Insert table 2]

3.3 Independent variables

The independent variable used in this study is SPINOFF, which is a dummy variable indicating

whether the parent firm has spun-off part of its entity or its subsidiary. It takes the value of 0

announcement of the spin-off and the years after the announcement. Specifically, I look at the

announcement date and not the effective date of the spin-off since the announcement date

already is likely to influence the demand and supply of financial analysts. The following GLS

model is put forth to test hypothesis 1:

NumAF= β0 + β1SPINOFF + β2MKTVAL + β3BTM + β4ROA + β5TURNi + β6AGEi+ β7NYSE

+ β8LEVA + β9SDNI + β10 EARNGROW + β11 SIC + B12YEAR + ε (1)

To test hypothesis 2, I include the variable FOCUS which indicates whether the spin-off is a

focus increasing spin-off or a non-focus increasing spin-off. This is done by comparing the SIC

code of the parent firm with the SIC code of the spun-off firm. The Standard Industrial

Classification (SIC) are four-digit codes that categorize the industries that companies belong

to based on their business activities. I compare the first two numbers of the SIC code of the

parent with the SIC code of the spun-off firm since the first two numbers best represents the

major industry sector to which a business belongs. If the first two numbers of the SIC code of

the parent is equal to first number of the SIC code of the spun-off, the dummy variable FOCUS

gets a value of 0, if the SIC code is different, the variable gets a value of 1. The following GLS

model is put forth to test hypothesis 2 (2). The regression is run twice, for the sample of focus

increasing spin-offs and for the sample for non-focus increasing spin-offs.

NumAF= β0 + β1SPINOFF + β2MKTVAL+ β3BTM + β4ROA + β5TURN + β6AGE+ β7NYSE + β8LEVA + β9SDNI + β10EARNGROW + β11SIC + B12YEAR + ε (2)

To test hypothesis 3, the relative size of the spin-off must be determined. In order to calculate

this, I scale the value of the deal of the spin-off by the total assets of the parent as a proxy for

the relative size of the spin-off. Based on the relative size of the spin-off, I determine the

dummy variable SIZESPINOFF. This dummy variable is an indicator whether the relative

model is used to test hypothesis 3 (3). The regression run is twice, for the sample of the

relatively large spin-offs and the relatively small spin-offs.

NumAF= β0 + β1SPINOFF β2MKTVAL+ β3BTM + β4ROA + β5TURN + β6AGE+ β7NYSE + β8LEVA + β9SDNI + β10EARNGROW + β11SIC + B12YEAR + ε (3)

3.3 Control variables

To control for possible other factors explaining why the post-spinoff financial analyst following might change I use several control variables. Similar to Bhushan (1989), I include

the market value (MKTVAL) in the regression, meaning that larger firms are more likely to

have higher analyst following. I include the variable INTAN since Barth et al. (2001) find that

companies with higher R&D expenses and higher advertising expenses are followed by

significantly more analysts. Also, I computed the book-to-market value (BTM) since Cheng

(2008) finds that growth companies are likely to have a more financial analysts following their

firm. Furthermore, I include return on assets (ROA) and earnings growth rate (EARNGROW)

since I expect that analysts prefer to follow firms that perform well (Jeong, 2020). Other factors

that I control for are share TURNOVER (TURN) following Lee and Swaminathan (2000), the

age of the firm (AGE), whether the firm is listed on the New York Stock Exchange (NYSE),

4 Results

4.3 Descriptive statistics and Pearson correlation matrix

Table 3 shows the descriptive statistics of all the variables which includes the mean, standard

deviation, the minimum and maximum. The differences in amount of observations between

the variables is caused by missing data from Compustat or SDC Platinum base. The mean of

dependent variable NumAF is 11.6, meaning that a firm in my sample had on average 11.6

financial analysts following their company. The average of SPINOFF is 0.564 meaning that

55,6% of the total observations are observations after the spin-off has been announced.

Furthermore, 36,9% of the total spin-offs are focus increasing spin-offs.

[Insert table 3]

Table 4 shows the Pearson correlation between all variables used in the regression model. As

expected MKTVAL is correlated with NumAF variable positively and significantly. Some

variables are correlated statistically significant at the 10% level as depicted in the table 4

however none of the variables are correlated at the 5% significance level. Since the correlation

between all the variables are between -0.36 and 0.55 the risk of multicollinearity is disregarded

which indicates better precision of the estimate coefficients and the statistical power of the

regression models.

[Insert table 4]

4.4 Regression analysis

In table 5 the results of the regression for Hypothesis 1 are shown. The results indicate that a

spin-off is likely to reduce the number of financial analysts following the parent firm in the

years after the spin-off has been announced. The coefficient is negative and highly significant

(β=-0.0764, p<0.01). Although the findings are significant, we reject Hypothesis 1 since the

spin-off is likely to impact the financial analyst following the parent firm in the period 2 years

after the announcement date however this does not lead to significant results. The control

variable MKTVAL is significant (β=0.219, p<0.01) meaning that firms with a higher market

capitalization have more financial analysts following their company. The BTM (β=-0.0347,

p<0.01) and the EARNGROW (β=0.0194, p<0.01) control variables are significant, suggesting

that higher growth or more established firms are likely to have higher analyst following. Also,

similar to Alford and Berger (1999), I find a positive coefficient on TURN (β=0.065, p<0.01),

which is in line with financial analyst responding to the investors’ demand for information. I

find a positive coefficient on AGE suggesting that more established firms attract greater analyst

following (β=0.013, p<0.01). Stocks listed on the New York Stock exchange are likely to

attract greater analyst following (β=0.417, p<0.01). Lastly, I find a negative coefficient on

LEVA meaning that firms with relatively more equity attract greater analyst following (β=-0.035, p<0.01).

[Insert table 5]

Table 6 shows the results of the regression regarding Hypothesis 2. The results indicate that

focus increasing spin-offs are likely to decrease financial analyst following relatively more

compared to non-focus increasing spin-offs (β=-1.213, p<0.10) vs (β=-0.0879, p>0.10).

Another significant result is the variable INTAN (β=-0.059, p<0.05). This would suggest that

companies prefer following companies that with lower R&D expenses. However, the

univariate correlation between analyst following and INTAN is positive (0.03) and significant.

The negative relation between INTAN and NumAF represents the marginal effect after

controlling for other determinants.

Table 7 shows the results of the regression for Hypothesis 3. With this hypothesis I analyze

whether the relative size of the spin-off has an impact on the financial analysts following the

parent firm. In order to test hypothesis 3, I run a suest test between the coefficient of the

SPINOFF variable for the sample for relatively large spin-offs and the coefficient of the SPINOFF variable for the sample for the relatively small spin-offs. This results in a p-value<0.01 meaning that H3 is not supported since firms that spin-off a large portion of their

company have a significantly higher financial analyst following compared to firms that

spin-off a smaller portion. A control variable that has not been found significant in previous

regressions but is significant in this regression, is the variable SDNI (β=-.0298, p<0.01). This

finding suggests that financial analysts typically are more likely to follow firms that have more

volatile operating environments.

5 Discussion

5.3 Results

Corporate spin-offs are major economic events that impact a variety of stakeholders. One of

these stakeholders are financial analysts which act as an information intermediary in capital

markets. They drive investor behavior and therefore influence share prices (Benner, 2007). The

purpose of this study is to analyze the effect of a spin-off on the financial analysts following

the parent firm. While I expected that spin-offs would likely increase financial analyst

following, the results of this study indicate that spin-offs instead decrease financial analyst

following. Also, in contradiction to my expectations, relatively large spin-offs result in an

increased number of financial analysts following the parent firm. A potential explanation for

the findings contradicting my hypotheses is that in the event of a spin-off, the financial analysts

might be deterred because of the divesture and produce less accurate forecasts. Therefore, some

analyst might decide to drop coverage, leading to a lower financial analyst following. In case

of a larger spin-off however, the parent firm might become easier to understand thus attracting

new analysts. Also, a larger spin-off could indicate restructuring efforts by the parent firm

which increases the demand for financial analysts (Capron Dussauge and Mitchell, 1998). The

results also indicate that a focus increasing spin-off is likely to decrease financial analyst

following relatively more compared to a non-focus increasing spin-off. Although this result is

also contradicting my expectations, it is in line with the findings of Feldman (2016). In his

paper he finds that focus increasing spin-offs induce analysts to revisit their existing coverage

decisions to a greater extent than non-focus increasing spin-offs. The general finding of my

study that a spin-off decreases financial analyst following could thus be stronger for a focus

increasing spin-off compared to a non-focus increasing spin-off. Furthermore, my findings

analyst following. I find in my study that firm size, trading volume and firm performance are

positively related to analyst following.

5.4 Theoretical contribution and managerial implications

Regarding the theoretical contribution, this paper is one of the first papers to look at the effect

of a spin-off on the financial analyst following. Whereas the paper of Feldman (2016) explains

how the composition and quality of the financial analyst coverage changes after a spin-off, this

paper examines the link between a spin-off and the effect it has on the number of financial

analysts following the parent firm. By doing so it contributed to existing literature by finding

another determinant of financial analyst following. This paper also has managerial

implications. Financial analysts play a significant role for creating value for investors. Since

the results indicate that firms generally lose coverage by financial analysts after a spin-off, the

visibility of a firms’ stock could decline. This in turn can lead to less demand for the stock and

a lower share price. In case the coverage of financial analysts is deemed as important for a

company, it could be detrimental to spin-off part of its business.

5.5 Limitations and future research.

This study has several limitations. First, my study is done by using data from US companies so

whether the findings are generalizable to different countries is not clear. Determinants for

financial analysts to cover a firm in the US could potentially be different from financial analysts

in Europe. Furthermore, it is important to note that not all analysts that make earnings forecast

of company are registered in the IBES database. Every broker voluntarily shares their estimates

to IBES and not mandatory. So, there may be more financial analysts following a firm that I

do not account for in my data. Furthermore, the method I used to determine the relative size

of the spin-off can be considered as a rough proxy. The reason to proxy the relative size of a

respect to computation and availability of data. This study has been done by using quantitative

data to explain why spin-offs could impact financial analyst following. I found that in the

literature there are limited amount of case and interview studies. For future research it could

be interesting to go into more depth with respect to how particular analysts decide which

companies to follow. Furthermore, it could be interesting to study to what extend managers

consider the coverage of financial analyst as a determinant factor influencing their decision to

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7 Appendix

Table 1 Sample construction

Observations 1 Financial data of US firms between 1979-2020 obtained from Compustat 466,269 2 Less: observations not linked to I/B/ES summary history file regarding

financial analyst following

-368,149

3 Less: observations not linked to the SDC platinum base regarding spin-offs -90,824 4: Less: missing values in observations -2,916

5: Sample used to test the effect of spin-offs on the financial analyst following the parent firm (H1)

Table 2 Variable definitions Dependent variable

NumAF Number of financial analysts with estimates of current-year EPS, as reported in the IBES Summary File for the 12th _{month average prior to the fiscal year-end.} Independent variables

SPINFOFF Dummy variable indicating whether the spin-off has already been announced. The value is 0 in the years the spin-off has not been announced yet and 1 in the years the spin-off has been announced.

FOCUS Dummy variable indicating whether the spin-off is focus increasing or not. The value is 1 in case the parent and the spun-off have the same first 2-digit SIC industry code and 0 in case the parent and the spun-off have different first 2-digit SIC industry codes.

SIZESPINOFF Dummy variable indicating whether the spin-off is a large spin-off or a small spin-off. The relative size of the spin-off determined as the value of the deal scaled by the total assets of the parent firm. The variable takes a value of 1 if the relative size of the spin-off is above the median of the sample and 0 if the spin-off is below the median of the sample.

Control variables

MKTVAL The market value of equity of firm i at the end of year t.

BTM The book value of equity divided by the market value of equity for firm i in year t.

ROA The net income divided by lagged total assets for firm i in year t.

TURN The percentage of firm i's shares traded during year t.

AGE The number of years between the fiscal period end date and the date the firm first appears in the Compustat database for firm i in year t.

SDNI Standard deviation of net income at the end of the year t of firm i over the prior 3 years.

NYSE Dummy variable indicating if the firm is listed on the New York Stock Exchange or not.

INTAN Research and development plus advertising expense scaled by total assets at the end of the year t.

SIC The first digit SIC code indicating the major industry type of firm I in year t EARN GROW The growth in earnings in year t compared to the t-1.

Table 3 Descriptive Statistics

Variable Obs Mean Std. Dev. Min Max

NumAF 7151 11.564 8.436 1 34.083 SPINOFF 7151 .564 .496 0 1 FOCUS 4033 .369 .483 0 1 SIZESPINOFF 2405 .47 .499 0 1 MKVALT 4460 17141.228 33752.005 36.482 190107.97 BTM 4460 .502 .407 -.581 2.101 ROA 7011 .046 .091 -.344 .343 TURN 7062 1656976.9 1503741.5 90434.695 8358899 SDNI 6641 441.012 1109.141 1.416 7548.398 AGE 7151 19.161 10.933 1 41 NYSE 7,151 0.772 0.420 0 1 LEVA 7116 .602 .224 .107 1.241 INTAN 7124 .034 .057 0 .314 EARNGROW 6,662 2.134 140.597 -788.7305 11367

Whereas NumAF is the number of analysts following the parent firm. SPINOFF is a dummy variable indicating whether the spin-off has already been announced. The value is 0 in the years the spin-off has not been announced yet and 1 in the years the spin-off has been announced. FOCUS is a dummy variable indicating whether the spin-off is focus increasing or not. The value is 1 in case the parent and the spun-off have the same first 2-digit SIC industry code and 0 in case the parent and the spun-off have different first 2-digit SIC industry codes. SIZESPINOFF is a dummy variable indicating whether the spin-off is a large spin-off or a small spin-off. The relative size of the spin-off determined as the value of the deal scaled by the total assets of the parent firm. The variable takes a value of 1 if the relative size of the spin-off is above the median of the sample and 0 if the spin-off size is below the median of the sample. MKTVAL is the market value of equity. BTM is the book value of equity divided by the market value of equity. ROA is the net income divided by lagged total assets. TURN is the percentage of firm i's shares traded during year t. AGE is the number of years between the fiscal period end date and the date the firm first appears in the Compustat database. SDNI is the standard deviation of net income at the end of the year t of firm i over the prior 3 years. NYSE is a dummy variable indicating if the firm is listed on the New York Stock Exchange or not. INTAN is defined as Research and development plus advertising expense scaled by total assets at the end of the year t. EARN GROW is the growth in earnings in year t compared to the t-1.

Table 4 Pearson correlation matrix

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (1) NumAF 1.00 (2) SPINOFF -0.07* 1.00 (3) FOCUS -0.01 1.00 (4) SIZESPINOFF -0.07* 0.04* 0.00 1.00 (5) MKTVAL 0.55* 0.02 -0.06* -0.14* 1.00 (6) BTM -0.15* -0.04* 0.00 -0.02 -0.11* 1.00 (7) ROA 0.11* -0.04* -0.06* -0.09* 0.14* -0.25* 1.00 (8) TURN 0.05* 0.26* 0.05* 0.27* -0.17* 0.04* -0.11* 1.00 (9) SDNI 0.15* 0.04* -0.03* -0.06* 0.29* 0.05* -0.02 0.04* 1.00 (10) AGE 0.09* 0.57* -0.02 -0.06* 0.25* -0.09* 0.01 0.28* 0.13* 1.00 (11) NYSE 0.22* -0.07* -0.02 -0.27* 0.18* 0.05* 0.15* -0.20* 0.08* 0.13* 1.00 (12) LEVA 0.13* 0.09* 0.14* -0.23* 0.13* -0.21* -0.13* -0.03* 0.10* 0.18* 0.26* 1.00 (13) INTAN 0.03* -0.02 -0.04* 0.24* -0.03 -0.16* -0.11* 0.09* -0.01 -0.12* -0.36* -0.29* 1.00 (14) EARNGROW 0.00 0.02 0.01 0.02 -0.02 0.09* -0.35* 0.03* -0.02 -0.01 -0.03* 0.01 0.06* 1.00 *** p<0.01, ** p<0.05, * p<0.1

Whereas NumAF is the number of analysts following the parent firm. SPINOFF is a dummy variable indicating whether the spin-off has already been announced. The value is 0 in the years the spin-off has not been announced yet and 1 in the years the spin-off has been announced. FOCUS is a dummy variable indicating whether the spin-off is focus increasing or not. The value is 1 in case the parent and the spun-off have the same first 2-digit SIC industry code and 0 in case the parent and the spun-off have different first 2-digit SIC industry codes. SIZESPINOFF is a dummy variable indicating whether the spin-off is a large spin-off or a small spin-off. The relative size of the spin-off determined as the value of the deal scaled by the total assets of the parent firm. The variable takes a value of 1 if the relative size of the spin-off is above the median of the sample and 0 if the spin-off size is below the median of the sample. MKTVAL is the market value of equity. BTM is the book value of equity divided by the market value of equity. ROA is the net income divided by lagged total assets. TURN is the percentage of firm i's shares traded during year t. AGE is the number of years between the fiscal period end date and the date the firm first appears in the Compustat database. SDN is the standard deviation of net income at the end of the year t of firm i over the prior 3 years. NYSE is a dummy variable indicating if the firm is listed on the New York Stock Exchange or not. INTAN is defined as Research and development plus advertising expense scaled by total assets at the end of the year t.

Table 5

The effect of a spin-off on financial analyst following the parent firm

Variables (1) SPINOFF -0.0764*** (0.0239) MKVALT 0.219*** (0.0165) BTM -0.0347*** (0.00967) ROA 0.00665 (0.00923) TURN 0.0651*** (0.00985) SDNI -0.00716 (0.00701) AGE 0.0130*** (0.00354) NYSE 0.417*** (0.0746) LEVA -0.0352*** (0.0125) INTAN -0.0192 (0.0152) EARNGROW 0.0194*** (0.00723) Constant -0.185 (0.580) Observations 4,384 Number of firms 320 Industry FE YES Year FE YES

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1. Shown are the results of regressing analyst following on several variables. The sample includes 4,843 firm. The dependent variable is the number of analysts following the parent firm. SPINOFF is a dummy variable indicating whether the spin-off has already been announced. The value is 0 in the years the spin-off has not been announced yet and 1 in the years the spin-off has been announced. MKTVAL is the market value of equity. BTM is the book value of equity divided by the market value of equity. ROA is the net income divided by lagged total assets. TURN is the percentage of firm i's shares traded during year t. AGE is the number of years between the fiscal period end date and the date the firm first appears in the Compustat database. SDN is the standard deviation of net income at the end of the year t of firm i over the prior 3 years. NYSE is a dummy variable indicating if the firm is listed on the New York Stock Exchange or not. INTAN is defined as Research and development plus advertising expense scaled by total assets at the end of the year t. EARNGROW is the growth in earnings in year t compared to the t-1.

Table 6

The effect of a spin-off on financial analyst following the parent firm for focus increasing spin-offs and non-focus increasing spin-offs

Variables (1) Focus increasing spin-off (2) Non-focus increasing spin-off

SPINOFF -1.213* -0.0879 (0.673) (0.665) MKVALT 0.386*** 0.228*** (0.0475) (0.0209) BTM -0.0368** -0.0206 (0.0169) (0.0131) ROA -0.0229 0.0102 (0.0162) (0.0128) TURN 0.0917*** 0.0385*** (0.0198) (0.0136) SDNI 0.0322 0.00112 (0.0198) (0.00907) AGE 0.0132** 0.00429 (0.00556) (0.00595) NYSE 0.193 0.478*** (0.125) (0.113) LEVA -0.0250 -0.0544*** (0.0221) (0.0186) INTAN -0.0590** 0.00795 (0.0299) (0.0223) EARNGROW 0.00972 0.0183* (0.0114) (0.00988) Constant Observations 1,243 2,045 R-squared 0.3864 0.3534 Number of firms 133 189

Industry FE YES YES

Year FE YES YES

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1. Shown are the results of regressing analyst following on several variables. The dependent variable is the number of analysts following the parent firm. SPINOFF is a dummy variable indicating whether the spin-off has already been announced. The value is 0 in the years the spin-off has not been announced yet and 1 in the years the spin-off has been announced. MKTVAL is the market value of equity. BTM is the book value of equity divided by the market value of equity.

ROA is the net income divided by lagged total assets. TURN is the percentage of firm i's shares traded during year t. AGE is the number of years between the fiscal period end date

and the date the firm first appears in the Compustat database. SDNI is the standard deviation of net income at the end of the year t of firm i over the prior 3 years. NYSE is a dummy variable indicating if the firm is listed on the New York Stock Exchange or not. INTAN is defined as Research and development plus advertising expense scaled by total assets at the end of the year t. EARNGROW is the growth in earnings in year t compared to the t-1.

Table 7

The effect of a spin-off on financial analyst following the parent firm for large spin-offs and small spin-offs

Variables (1) Large spin-off (2) Small spin-off

SPINOFF 1.592*** -0.487 (0.248) (0.374) MKVALT 0.504*** 0.502*** (0.102) (0.127) BTM -0.142** -0.110** (0.0542) (0.0518) ROA 0.0549 -0.00311 (0.0529) (0.0653) TURN 0.296*** 0.131** (0.0608) (0.0576) SDNI 0.245*** -0.00304 (0.0768) (0.0126) AGE -0.0160 0.00880 (0.0103) (0.0112) NYSE 0.440*** 0.286 (0.159) (0.207) LEVA -0.0315 -0.0335 (0.0697) (0.0847) INTAN 0.0610 -0.0496 (0.0686) (0.0944) EARNGROW 0.0243 0.0276 (0.0343) (0.0242) Constant -1.654*** -0.169 (0.445) (0.714) Observations 991 971 Firms 86 83

Industry FE YES YES

Year FE YES YES

R-squared 0.465 0.483

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1. Shown are the results of regressing analyst following on several variables. The dependent variable is the number of analysts following the parent firm. SPINOFF is a dummy variable indicating whether the spin-off has already been announced. The value is 0 in the years the spin-off has not been announced yet and 1 in the years the spin-off has been announced. MKTVAL is the market value of equity. BTM is the book value of equity divided by the market value of equity. ROA is the net income divided by lagged total assets. TURN is the percentage of firm i's shares traded during year t. AGE is the number of years between the fiscal period end date and the date the firm first appears in the Compustat database. SDNI is the standard deviation of net income at the end of the year t of firm i over the prior 3 years. NYSE is a dummy variable indicating if the firm is listed on the New York Stock Exchange or not. INTAN is defined as Research and development plus advertising expense scaled by total assets at the end of the year t. EARNGROW is the growth in earnings in year t compared to the t-1.