Corporate Focus and Value Creation Evidence from Spinoffs

Posted: 24 May 2013 Last revised: 30 May 2013

See all articles by Lane Daley

Lane Daley

Independent

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Ranjini Jha

University of Waterloo - School of Accounting and Finance

Date Written: August 1, 1996

Abstract

We test a prediction from the corporate focus literature that cross-industry spinoff distributions, where the continuing and spunoff units belong to different two-digit Standard Industry Classification codes, create more value than own-industry spinoffs. Our results indicate significant value creation around the announcement of cross-industry spinoffs only. We then provide evidence on whether the value creation comes from operating performance improvements, or bonding benefits, or both, where bonding refers to a pre-commitment by managers to avoid cross-subsidizing relatively poor performing units within the firm. We find a significant improvement in operating performance for cross-industry spinoffs, and none for own-industry cases. We do not find strong evidence of bonding to explain spinoff-related value creation. Further, the operating performance improvement is associated with the continuing rather than the spunoff entity, consistent with the hypothesis that spinoffs create value by removing unrelated businesses and allowing managers to focus attention on the core operations they are best suited to manage.

Keywords: Spinoff, Divestiture, Focus, Cross-subsidization

JEL Classification: G34, G35

Suggested Citation

Daley, Lane and Mehrotra, Vikas and Jha, Ranjini, Corporate Focus and Value Creation Evidence from Spinoffs (August 1, 1996). Journal of Financial Economics (JFE), Vol. 45, No. 2, 1997; University of Alberta School of Business Research Paper No. 2013-228. Available at SSRN: https://ssrn.com/abstract=2269367

Lane Daley

Independent

No Address Available

Vikas Mehrotra (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

Ranjini Jha

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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