Corporate Spinoffs: Trash or Treasure?
Posted: 25 Aug 1998
We examine holding period excess returns and measures of financial performance accumulated from selected accounting data around the time that entities engaged in a spinoff. We divide our sample into cases where the spunoff unit (subsidiary) is in the same industry (2-digit SIC code) as the pre-existing firm (parent), and those where this is not the case (cross-industry spinoffs). Our major results are twofold. First, value creation occurs in cross-industry spinoffs due to the parent taking out the trash by separating poor performing units. Performance improvements here appear to relate primarily to efficiency improvements. Own-industry spinoffs create little overall value, but there is some evidence that the subsidiaries generate some value by scale expansion, although there is no evidence of efficiency gains in this group. Second, cross-industry spinoffs arise for firms that are much more heavily dependent upon external equity capital for supporting operations, perhaps as a means to bond management against cross-subsidization of poor performing units. On the contrary, own-industry spinoffs do not appear to be motivated by this bonding requirement.
JEL Classification: G34
Suggested Citation: Suggested Citation