The Effects of Institutional Investor Preferences on Ownership Changes and Stock Prices Around Corporate Spin-Offs

37 Pages Posted: 25 Aug 1998

See all articles by Jeffery S. Abarbanell

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area

Brian J. Bushee

University of Pennsylvania - The Wharton School

Jana Smith Raedy

University of North Carolina at Chapel Hill

Date Written: August 1998

Abstract

Because spin-offs create new firms with characteristics markedly different from the original firm, institutional investors pre-committed to certain investment styles and/or subject to fiduciary restrictions have incentives to rebalance their portfolios at the time of the spin-off. Prior articles in the business press and academic journals claim that the large volume of trading related to this rebalancing creates short-term price pressure in stocks of the entities emerging from the spin-off. In this paper, we examine whether corporate spin-offs lead to significant changes in the holdings of institutional investors and whether these changes do create temporary price pressure. We find strong evidence that investment strategy and fiduciary restrictions affect institutional investor demand for the stocks after spin-offs. However, our results indicate that matching of institutional buying and selling is sufficiently complete in most cases to allow for large volumes of shares to change hands without prices deviating from fundamentals.

JEL Classification: G11, G14, G20, G34

Suggested Citation

Abarbanell, Jeffery S. and Bushee, Brian J. and Smith Raedy, Jana, The Effects of Institutional Investor Preferences on Ownership Changes and Stock Prices Around Corporate Spin-Offs (August 1998). Available at SSRN: https://ssrn.com/abstract=118608 or http://dx.doi.org/10.2139/ssrn.118608

Jeffery S. Abarbanell

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Brian J. Bushee (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-4872 (Phone)
215-573-2054 (Fax)

Jana Smith Raedy

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-7475 (Phone)
919-962-4727 (Fax)

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