Learning About Internal Capital Markets From Corporate Spinoffs

47 Pages Posted: 26 Jan 2001  

Robert H. Gertner

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Eric A. Powers

University of South Carolina - Darla Moore School of Business

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Date Written: November 2000

Abstract

This paper examines the investment behavior of firms before and after they are spun off from their parent companies. We show that investment after the spinoff is significantly more sensitive to measures of investment opportunities (e.g. industry Tobin's Q or industry investment) than it is before the spinoff. Spinoffs tend to cut their investment in low Q industries and increase their investment in high Q industries. These changes are observed only in spinoffs of firms in industries unrelated to the parents' industries and in spinoffs where the stock market reacts favorably to the spinoff announcement. Our findings point to the possibility that one effect of spinoffs is to improve the allocation of capital.

JEL Classification: G31,G34

Suggested Citation

Gertner, Robert H. and Powers, Eric A. and Scharfstein, David S., Learning About Internal Capital Markets From Corporate Spinoffs (November 2000). Available at SSRN: https://ssrn.com/abstract=255922 or http://dx.doi.org/10.2139/ssrn.255922

Robert H. Gertner

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric A. Powers (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-4928 (Phone)

David S. Scharfstein

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-496-5067 (Phone)
617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
1,176
Rank
13,137
Abstract Views
5,260