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Article: Segment profitability, misvaluation, and corporate divestment

TitleSegment profitability, misvaluation, and corporate divestment
Authors
KeywordsCorporate divestment
Earnings manipulation
Information symmetry
Misvaluation
Segment profitability
Issue Date2007
Citation
Accounting Review, 2007, v. 82, n. 1, p. 1-26 How to Cite?
AbstractThis paper develops a theoretical model to explain corporate divestment in the context of accounting-based valuation and provides empirical evidence to support the model's predictions. Building on Zhang's (2000) real-options-based equity value model, we develop a model to explain why firms with multiple business segments may have incentives in financial reporting to shift earnings from one segment to another to influence market valuation. Cross-segment earnings shifting, however, causes information asymmetry about segmental performance, which leads to market misvaluation. Divestment arises as a voluntary commitment by (some) firms to not engage in segmental earnings manipulation, with the aim of restoring valuation accuracy. Our theoretical analysis yields a number of testable implications. Consistent with our model's predictions, we find empirically that (1) divestment is preceded by an increased divergence in profitability between the divested and continuing segments of the divesting firm, (2) there are positive abnormal stock returns surrounding divestment announcements that are not dependent on increased expectations about future operating performance, (3) the magnitude of market revaluation increases with the profitability divergence between the divested and continuing segments, and (4) market revaluation is greater for more complex firms (in terms of having a larger number of segments and greater uncertainty facing investors).
Persistent Identifierhttp://hdl.handle.net/10722/233777
ISSN
2015 Impact Factor: 1.953
2015 SCImago Journal Rankings: 4.478

 

DC FieldValueLanguage
dc.contributor.authorChen, Peter F.-
dc.contributor.authorZhang, Guochang-
dc.date.accessioned2016-09-27T07:21:37Z-
dc.date.available2016-09-27T07:21:37Z-
dc.date.issued2007-
dc.identifier.citationAccounting Review, 2007, v. 82, n. 1, p. 1-26-
dc.identifier.issn0001-4826-
dc.identifier.urihttp://hdl.handle.net/10722/233777-
dc.description.abstractThis paper develops a theoretical model to explain corporate divestment in the context of accounting-based valuation and provides empirical evidence to support the model's predictions. Building on Zhang's (2000) real-options-based equity value model, we develop a model to explain why firms with multiple business segments may have incentives in financial reporting to shift earnings from one segment to another to influence market valuation. Cross-segment earnings shifting, however, causes information asymmetry about segmental performance, which leads to market misvaluation. Divestment arises as a voluntary commitment by (some) firms to not engage in segmental earnings manipulation, with the aim of restoring valuation accuracy. Our theoretical analysis yields a number of testable implications. Consistent with our model's predictions, we find empirically that (1) divestment is preceded by an increased divergence in profitability between the divested and continuing segments of the divesting firm, (2) there are positive abnormal stock returns surrounding divestment announcements that are not dependent on increased expectations about future operating performance, (3) the magnitude of market revaluation increases with the profitability divergence between the divested and continuing segments, and (4) market revaluation is greater for more complex firms (in terms of having a larger number of segments and greater uncertainty facing investors).-
dc.languageeng-
dc.relation.ispartofAccounting Review-
dc.subjectCorporate divestment-
dc.subjectEarnings manipulation-
dc.subjectInformation symmetry-
dc.subjectMisvaluation-
dc.subjectSegment profitability-
dc.titleSegment profitability, misvaluation, and corporate divestment-
dc.typeArticle-
dc.description.natureLink_to_subscribed_fulltext-
dc.identifier.doi10.2308/accr.2007.82.1.1-
dc.identifier.scopuseid_2-s2.0-33847754611-
dc.identifier.volume82-
dc.identifier.issue1-
dc.identifier.spage1-
dc.identifier.epage26-

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