Review of Quantitative Finance and Accounting, 24: 277–293, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
Line-of-Business Disclosures and Spin-Off
CLARK M. WHEATLEY
RB242B-School of Accounting, Florida International University, Miami, FL 33199, Tel.: 305-348-4209
ROBERT M. BROWN
Virginia Polytechnic Institute and State University
GEORGE A. JOHNSON
Winston-Salem State University
Abstract. We investigated disclosure decisions by identifying a circumstance, the spin-off of a segment, where
the beneﬁts of disclosure should outweigh the costs. We compared the valuation revisions associated with spin-off
announcements of ﬁrms with previous line of business disclosures to valuation revisions of ﬁrms making spin-off
announcements without these disclosures. We found signiﬁcant stock price increases associated with the spin-
off announcement regardless of prior segment disclosure history. We also found, however, that the stock price
increases were temporary for ﬁrms without prior segment disclosures, while the valuation revisions for ﬁrms with
previous line-of-business disclosure information persisted.
Keywords: disclosure, divestiture, spin-off, segment, valuation, returns
Do managers act in the best interests of investors when they choose not to disclose segment
data? Especially in light of favorable price effects from making such disclosures (Ronen and
Livnat, 1981)? Theoretical models generally indicate that greater levels of disclosure yield
higher ﬁrm valuations. Managers, however, must balance the beneﬁts of disclosure against
the possibility of competitive impairment and/or against their own personal interests. We
investigated this disclosure dilemma by identifying a circumstance, the spin-off of a business
segment, where the beneﬁts of disclosure should outweigh the costs, and we compared the
valuation revisions associated with such spin-offs for ﬁrms with and without prior line-of-
business disclosures. We found that in the absence of segment data, the announcement of a
corporate spin-off sends a negative signal to investors, and that shareholder wealth declines
as a result.
Theoretical models and empirical evidence generally indicate that greater levels of disclo-
sure result in a lower cost of capital and thus higher ﬁrm valuations (Jensen and Meckling,
Data Availability: The data employed in this study are available from the sources identiﬁed in the text.