Corporate Focus and Value Creation Evidence from Spinoffs
Posted: 24 May 2013 Last revised: 30 May 2013
Date Written: August 1, 1996
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: Suggested Citation