| This paper empirically investigates the role of stock price informativeness in the real sector using a sample of corporate spinoffs from 1975 to 2001. In the first part, I examine the impact of stock price informativeness on a firm's managerial decisions and operating performance. I find that changes in informativeness around the spinoff are positively related to the subsequent changes in operating performance of the parent firms. Those firms with increased informativeness make significant adjustments to improve investment efficiency following the spinoff. The results suggest that managerial investment decisions serve as one of the channels through which informed trading in the market contributes to firm performance. In the second part, I examine the changes in CFO compensation structure around the spinoff and investigate how it relates to stock price informativeness and operating performance. I find that firms increase the proportion of stock-based compensation significantly following spinoffs. These changes in stock-based compensation are positively associated with changes in subsequent firm performance, suggesting that stock-based compensation is an effective tool in structuring managerial incentives. I also find that informativeness-performance association stays positive and significant, controlling for the change in compensation structure around the spinoff. In sum, my findings provide support for the view that informed trading matters to the real sector. |
