Learning about Internal Capital Markets from Corporate Spin-offs
Robert H. Gertner
University of Chicago - Finance; National Bureau of Economic Research (NBER)
Eric A. Powers
University of South Carolina - Moore School of Business
David S. Scharfstein
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
The Journal of Finance, Vol. 57, pp. 2479-2506, 2002
We examine the investment behavior of firms before and after being spun off from their parent companies. Their investment after the spin-off is significantly more sensitive to measures of investment opportunities (e.g., industry Tobin's Q or industry investment) than it is before the spin-off. Spin-offs tend to cut investment in low Q industries and increase investment in high Q industries. These changes are observed primarily in spin-offs of firms in industries unrelated to the parents' industries and in spin-offs where the stock market reacts favorably to the spin-off announcement. Our findings suggest that spin-offs may improve the allocation of capital.
Accepted Paper Series
Date posted: August 27, 2003
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