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Capital Structure in Corporate Spin-offs

Amy K. Dittmar

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business

January 2002

This paper investigates how firms determine the capital structure of a subsidiary that is divested in a spin-off. In a spin-off, the parent divides the assets of the firm and chooses the capital structure for the new, stand-alone entity. Unlike the firms in other capital structure studies, the subsidiary's leverage ratio is its initial capital structure. Thus, the typical explanations for why firms' leverage ratios may deviate from their target ratios do not apply. I therefore use this sample to investigate how firms determine their capital structure. I find that the subsidiary has a leverage ratio lower than the parent but similar to a comparable non-spin-off firm. Also, similar to other firms, the subsidiary's leverage is negatively related to growth and positively related to its collateral value. However, unlike other firms, leverage is not inversely related to profitability. Further, the difference between the subsidiaries' and comparable firms' leverage ratios is positively related to profitability. These results support the predictions of the trade off theory of capital structure and provide insight into why previous studies find a negative relation between leverage and profitability.

Number of Pages in PDF File: 50

Keywords: Spin-off; Capital structure; Leverage; Divestiture

JEL Classification: G32, G34

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Date posted: March 31, 2000  

Suggested Citation

Dittmar, Amy K., Capital Structure in Corporate Spin-offs (January 2002). Available at SSRN: https://ssrn.com/abstract=217429 or http://dx.doi.org/10.2139/ssrn.217429

Contact Information

Amy Dittmar (Contact Author)
University of Michigan at Ann Arbor - The Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-3108 (Phone)
HOME PAGE: http://webuser.bus.umich.edu/adittmar/

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