Spin-Offs, Divestitures, and Conglomerate Investment

57 Pages Posted: 4 Mar 2005 Last revised: 23 Nov 2009

Gonul Colak

Hanken School of Economics

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: January 1, 2005

Abstract

We examine whether spin-offs or divestitures cause improvements in conglomerate investment efficiency. At issue are endogeneity of these restructuring decisions and correct measurement of investment efficiency. Endogeneity is a problem because the factors that induce firms to spin off or divest divisions may also improve investment efficiency; measurement error is a problem because efficiency measures employ Tobin's q as a noisy proxy for investment opportunities. We find important differences between firms that divest or spin off and a control sample. After accounting for these differences and for measurement error in q, we find no evidence of improvements in investment efficiency.

Keywords: Conglomerate discount, refocussing, investment, endogeneity, measurement error

JEL Classification: G31, G34

Suggested Citation

Colak, Gonul and Whited, Toni M., Spin-Offs, Divestitures, and Conglomerate Investment (January 1, 2005). Available at SSRN: https://ssrn.com/abstract=676034 or http://dx.doi.org/10.2139/ssrn.676034

Gonul Colak

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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