Thereasonsforthediscounthavebeenwidelydebated,with
manyattributingittothelackoffocusinthesefirmsandthe
inefficiencies that follow. Another possible reason for the
discount,though,maybethecomplexitythatgetsaddedto
financialstatementsasfirmsentermultiplebusinesses.Even
thebestefforts ofthesefirms tobe moretransparent often
cannot overcome this problem. First, conglomerates
inevitablyconsolidatecostsforsomefunctions—afterall,one
reasonforcreatingconglomeratesistocreateeconomies of
scale—and these consolidated costs These allocations are
subjectiveandinvestorsmaybedubiousabouttheresulting
bottom-linenumbers. Second,theabsenceofmarket prices
fortheindividualdivisionsmakesitdifficultforinvestorsto
see the value of each division and consider the market
reactions to actions taken by that division.
How canwedifferentiatebetweendiscounts attributableto
management inefficienciesand those causedby accounting
complexity? We can look at market reactions to
conglomeratesthatdobreakuptocreateindependententities
runbyincumbentmanagement.Ifthereasonforthediscount
is accounting complexity alone, splitting the firm into
independentbusinesses withtheir ownfinancial statements
(and perhaps their own tracking stock) while preserving
incumbentmanagementcontrolof theoverallentity should
eliminate the discount. If, however, it is management
inefficiencythatistheproblem,weshouldexpecttoseethe
discountpersistevenafterthesplit-up,sinceonlydivestitures
willeliminatetheunderlyingproblemofpoormanagement.
The positive reactions associated with spin-offs, split-offs,
anddivestiturescanalsobeviewedasindirectevidencethat
markets reward transparency. Linn and Rozeff (1984)
examinedthepricereactiontoannouncementsofdivestitures