Spinoff Wealth Effects and the Dismantling of Internal Capital Markets

34 Pages Posted: 23 Nov 2001

See all articles by Chris R. McNeil

Chris R. McNeil

affiliation not provided to SSRN

William T. Moore

University of South Carolina

Date Written: March 2001

Abstract

We provide evidence directly linking spinoff announcement returns to the pre-spinoff conduct of internal capital markets. Firms' internal capital markets may enhance value by channeling capital to divisions with superior investment opportunities (high Tobin's q), and/or by starving divisions with poor opportunities (low Tobin's q). Alternatively, these markets may reduce value by doing just the opposite. We examine whether the dismantling of internal capital markets contributes to the effects of spinoffs on shareholder value by estimating a model of the announcement return. The key explanatory variable is a measure of investment efficiency that accounts for the amount and direction of capital subsidy from parent to division, and the division's q-ratio relative to that of the parent. We find evidence of higher announcement returns when the parent allocates capital to the divested division in a seemingly inefficient manner.

Keywords: spinoffs, internal capital markets, investment efficiency, divestitures

JEL Classification: G31, G34

Suggested Citation

McNeil, Christopher R. and Moore, William Ted, Spinoff Wealth Effects and the Dismantling of Internal Capital Markets (March 2001). Available at SSRN: https://ssrn.com/abstract=291470 or http://dx.doi.org/10.2139/ssrn.291470

Christopher R. McNeil (Contact Author)

affiliation not provided to SSRN

William Ted Moore

University of South Carolina ( email )

Darla Moore School of Business The Francis M. Hipp
Columbia, SC 29208
United States
803-777-4905 (Phone)
803-777-6876 (Fax)

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