Spinoffs, Privatization and Corporate Performance in Emerging Markets

Abstract

We use new firm-level data to examine the effects of spinoffs and privatization on corporate performance in a rapidly emerging market economy. Unlike the existing literature, which analyzes spinoffs almost exclusively in advanced economies, we control for accompanying ownership changes and the fact that spinoffs and ownership are endogenous variables. We find that spinoffs increase the firm's profitability but do not alter its scale of operations, while the effect of privatization depends on the resulting ownership structure - sometime improving performance and sometime bringing about decline that is consistent with tunneling (looting) by managers or (partial) owners. The effects of privatization are hence much less clear-cut than suggested in earlier studies. Methodologically, our study provides evidence that it is important to control for changes in ownership when analyzing spinoffs and generally to control for endogeneity, selection and data attrition when analyzing the effects of spinoffs and privatization.

Keywords: Spinoffs, breakups, privatization, corporate performance, endogeneity

JEL Classification: D23, G32, G34, L20, M21, P47