Spin-offs: Theory and Evidence from the Early U.S. Automobile Industry

Cabral, Luis M. B.; Wang, Zhu

doi:10.2139/ssrn.1335345

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Spin-offs: Theory and Evidence from the Early U.S. Automobile Industry

Federal Reserve Bank of Kansas City Working Paper No. 08-15

31 Pages Posted: 31 Jan 2009 Last revised: 21 Aug 2009

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Zhu Wang

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: December 22, 2008

Abstract

We develop a "passive learning" model of firm entry by spin-off: firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a low productivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-off (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding "covenant not to compete" laws.

Keywords: Passive learning, entry and exit

JEL Classification: J6, L0

Suggested Citation: Suggested Citation

Cabral, Luis M. B. and Wang, Zhu, Spin-offs: Theory and Evidence from the Early U.S. Automobile Industry (December 22, 2008). Federal Reserve Bank of Kansas City Working Paper No. 08-15, Available at SSRN: https://ssrn.com/abstract=1335345 or http://dx.doi.org/10.2139/ssrn.1335345