The Effects of Corporate Spin-offs on Productivity

Abstract:     
Using a unique sample of plant level data from the Longitudinal Research Database (LRD) of the U.S. Census Bureau, we identify, how (the precise channel and mechanism), where (parent or subsidiary), and when (the dynamic pattern) efficiency improvements arise following corporate spin-offs. We analyze the source of productivity improvements in spin-offs by comparing the magnitude of post-spin-off changes in the wages, employment, materials costs, rental and administrative expenses, sales, and capital expenditures in the plants belonging to firms undergoing spin-offs relative to the magnitude of such changes in a control group of plants belonging to firms not undergoing spin-offs. We show that the total factor productivity (TFP) of plants belonging to spin-off firms (parent or spun-off subsidiary), increase on average immediately following the spin-off and is long lived. This post spin-off productivity improvement can be attributed to cost savings but not to better product market performance. Further, such improvements arise primarily in plants that remain with the parent; plants belonging to the spun-off subsidiary do not experience such productivity improvements. However, contrary to speculation in the previous literature, we show that plants that are spun-off do not underperform parent plants prior to the spin-off. We identify acquisitions subsequent to spin-offs and find that productivity improves for both subsequently acquired and non-acquired groups of plants: while such improvements occur immediately after the spin-off for the non-acquired plants, for the acquired plants they start only after being taken over by another firm. Finally, we show that while post spin-off productivity improves in both related and unrelated spin-offs, unrelated spun-off entities show greater improvements in productivity compared to related spun-off entities.

Number of Pages in PDF File: 55

Keywords: Spin-offs, Restructuring, Total Factor Productivity (TFP), Employment, Wages

JEL Classification: G30, G34

working papers series