Predictability of Long-Term Spin-Off Returns

Abstract

Investment strategies of buying and holding recently spun off companies and their parents have received significant attention from the investment community in the recent past. Despite their popularity, the existing evidence on the attractiveness of spin-offs appears piecemeal. In this paper, we examine in detail stock price performance of spin-offs and their parents on a comprehensive sample that covers the last 36 years. We show that excess returns are indeed positive for both subsidiary and parent companies over almost all holding periods considered. For subsidiaries, the results appear both economically and statistically significant after various adjustments for risk. This evidence is consistent with investors earning an above normal rate of return by investing in recently spun off subsidiaries. For parents, however, after correcting for one very large positive outlier, returns are not statically or economically different from zero.

Keywords: Spin-off, long-run event studies, excess stock returns

JEL Classification: G00