Learning About Internal Capital Markets from Corporate Spin-Offs

Posted: 27 Aug 2003

See all articles by Robert H. Gertner

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)

Abstract

We examine the investment behavior of firms before and after being spun off from their parent companies. Their investment after the spin-off is significantly more sensitive to measures of investment opportunities (e.g., industry Tobin's Q or industry investment) than it is before the spin-off. Spin-offs tend to cut investment in low Q industries and increase investment in high Q industries. These changes are observed primarily in spin-offs of firms in industries unrelated to the parents' industries and in spin-offs where the stock market reacts favorably to the spin-off announcement. Our findings suggest that spin-offs may improve the allocation of capital.

Suggested Citation

Gertner, Robert H. and Powers, Eric A. and Scharfstein, David S., Learning About Internal Capital Markets from Corporate Spin-Offs. The Journal of Finance, Vol. 57, pp. 2479-2506, 2002. Available at SSRN: https://ssrn.com/abstract=369709

Robert H. Gertner (Contact Author)

University of Chicago - Finance ( email )

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Eric A. Powers

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

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David S. Scharfstein

Harvard Business School - Finance Unit ( email )

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617-496-8443 (Fax)

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

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