Target Behavior in Corporate Spin-Offs? Evidence from Debt Ratio- and Financing Decision-Based Tests

47 Pages Posted: 23 Sep 2022

See all articles by Marcel Heinze

Marcel Heinze

Ruhr University of Bochum - Department of Finance and Banking

Simon Finke

Ruhr University of Bochum - Department of Finance and Banking

Date Written: September 13, 2022

Abstract

This paper examines target following behavior of capital structure decisions in corporate spin-offs. Using this setting of large divestments, we examine if managers show target behavior, i.e., follow target capital structures, by applying two different testing strategies. In our sample of U.S. spin-offs between 1998 and 2015 we show that the results of established debt ratio-based tests could be biased by mean-reversion. After showing target behavior using such tests from the context of corporate investments, we show that target behavior can no longer be de-tected when analyzing active financing decisions, i.e., the issuance and retirement of debt and equity. We add to the literature raising serious concerns about the reliability of tests of target behavior in corporate finance.

Keywords: Spin-Offs, Target Leverage, Target Behavior, Financing Decisions, Mean-Reversion

JEL Classification: G32, G34

Suggested Citation

Heinze, Marcel and Finke, Simon, Target Behavior in Corporate Spin-Offs? Evidence from Debt Ratio- and Financing Decision-Based Tests (September 13, 2022). Available at SSRN: https://ssrn.com/abstract=4217445 or http://dx.doi.org/10.2139/ssrn.4217445

Marcel Heinze

Ruhr University of Bochum - Department of Finance and Banking ( email )

Universitätsstraße 150
44780 Bochum, 44801
Germany

Simon Finke (Contact Author)

Ruhr University of Bochum - Department of Finance and Banking ( email )

Germany

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