A little while ago, we highlighted some interesting academic research looking at the returns of spinoff stocks. Recently, another study looking at the space was published, albeit from a slightly different angle, by Harvard Business School doctoral graduate Emilie Rose Feldman and professors Stuart C. Gilson and Belén Villalonga.
The authors attempt to answer one of the questions which many of us in the financial world have internally debated for a long time - do analysts actually add any value? In order to solve this puzzle, the authors exclusively focused on spinoff situations because:
The potential for analysts to add value in this situation is especially high because while the new entities created by the spinoff have no stock price history—similar to an IPO—analysts may have been following the businesses of the parent and subsidiary for an extended time, giving them a comparative advantage in forecasting both entities’ future financial performance.
More from the Executive Summary:
Analysts pay relatively little attention in their reports to the subsidiaries that will be spun off, even though subsidiaries generally account for an economically significant share of firms’ operations before the spinoff. The complexity associated with forecasting earnings and stock prices in the context of corporate spinoffs, combined with analysts’ apparent disregard for subsidiaries in their analysis of corporate spinoffs, seem to limit analysts’ ability to add value as information intermediaries in this setting.
Although I have always found academic research a bit dry, the paper is worth reading. As active investors in spinoff situations, this paper has reasons for both optimism and pessimism. Some might come away from reading this and (Joel Greenblatt aside) wonder how they can possibly make money looking in this area if analysts, whose sole profession is to analyze these companies, have difficulties valuing spinoff situations. On the other hand, I believe it confirms the idea that spinoffs are an attractive space for precisely that reason. As a result of being difficult to understand and often underfollowed (whether analysts can’t or don’t does not matter), with hard work and good analysis profitable investments can be found. What do you think?