The Long-Run Performance of Sponsored and Conventional Spin-Offs

35 Pages Posted: 29 Apr 2008

See all articles by Jim Rosenfeld

Jim Rosenfeld

Emory University - Department of Finance

April Klein

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2008

Abstract

Unlike a conventional spin-off, a sponsored spin-off takes place when the subsidiary to be divested sells an equity stake to an outside investor before going public, thereby receiving a substantial capital infusion. We find that the stock return performance of a sample of 57 sponsored spin-offs from 1994 through 2005 is significantly negative over a three-year period following the spin-off date. In contrast, 182 conventional spin-offs over same interval record an average return performance. The parent firms' stock performance for the year preceding (following) the spin-off date is below-average (average), suggesting that their earlier performance was adversely affected by the subsidiary and motivated the parent to spin it off. In support of this contention, we find that parent firms tended to under-invest in the subsidiary prior to the spin-off, due to the subsidiary's limited growth opportunities. This under-investment, in turn, could have motivated the subsidiary to seek outside funding sources before going public.

Keywords: Spin-offs,Sponsored Spin-offs,Conventional Spin-offs,Long-Run Performance

Suggested Citation

Rosenfeld, James and Klein, April, The Long-Run Performance of Sponsored and Conventional Spin-Offs (March 5, 2008). Available at SSRN: https://ssrn.com/abstract=1126310 or http://dx.doi.org/10.2139/ssrn.1126310

James Rosenfeld (Contact Author)

Emory University - Department of Finance ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322-2710
United States

April Klein

New York University (NYU) - Department of Accounting ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012
United States

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