When Do Analysts Add Value? Evidence from Corporate Spinoffs

We investigate the information content and forecast accuracy of 1,793 analyst reports written around 62 spinoffs––a setting in which analysts’ ability to inform investors is potentially very high. We find that analysts pay little attention to subsidiaries about to be spun off even though these subsidiaries constitute a significant part of the parent company operations. Moreover, while the level of detail in analyst research about parent companies is significantly related to EPS and price forecast accuracy, the same is not true for the subsidiaries. We establish that this “forgotten child” phenomenon is linked to a “neglected parent” effect, whereby inaccuracy in subsidiary earnings forecasts is associated with inaccuracy in parent estimates. We conclude by showing that spinoffs may be a particularly complex setting for analysts to evaluate relative to other forms of corporate restructuring, such as IPOs, mergers, or bankruptcies, providing one potential explanation for our findings.