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

35 Pages Posted: 8 Oct 2008

See all articles by April Klein

April Klein

New York University (NYU) - Department of Accounting

Jim Rosenfeld

Emory University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 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

Klein, April and Rosenfeld, James, The Long-Run Performance of Sponsored and Conventional Spin-Offs (May 2008). NYU Working Paper No. APRIL KLEIN-9. Available at SSRN: https://ssrn.com/abstract=1280679

April Klein (Contact Author)

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

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

James Rosenfeld

Emory University - Department of Finance ( email )

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

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