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How About Spinoffs?

| | Posted in: Miscellaneous

A reader asked: “Have you done a review on spinoffs?”

The stream of opportunities related to spinoffs is modest. Social Science Research Network searches generate 177 papers for “spin-off” and 96 papers for “spinoffs”. Relevant examples are:

“Value Creation Through Spin-Offs: A Review of the Empirical Evidence”:

“This paper reviews the literature on the factors that influence the wealth effects associated with the announcements of corporate spin-offs. We use meta-analysis to summarize the findings of 26 event studies on spin-off announcements. We find a significantly positive average abnormal return of 3.02% during the event window. Returns are higher for larger spin-offs, for divestments that are tax or regulatory friendly and for spin-offs that lead to the divestiture of a non-related division. We also find that spin-offs that are later completed are associated with lower abnormal returns than non-completed spin-offs. In the second part of the paper we overview studies on the long-run stock price performance of spin-offs. Even though early studies find a long-run superior performance, this effect is no longer found in later studies that use more refined statistical tests.”

“Predictability of Long-Term Spin-Off Returns”:

“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.”

“Learning About Internal Capital Markets From Corporate Spinoffs”:

“This paper examines the investment behavior of firms before and after they are spun off from their parent companies. We show that investment after the spinoff is significantly more sensitive to measures of investment opportunities (e.g. industry Tobin’s Q or industry investment) than it is before the spinoff. Spinoffs tend to cut their investment in low Q industries and increase their investment in high Q industries. These changes are observed only in spinoffs of firms in industries unrelated to the parents’ industries and in spinoffs where the stock market reacts favorably to the spinoff announcement. Our findings point to the possibility that one effect of spinoffs is to improve the allocation of capital.”

“Shareholder Wealth Effects of Corporate Spin-offs: The Worldwide Experience 1990-1998”:

“This paper examines the effect of the initial spinoff announcement on shareholder wealth by means of an ex ante study. The event study is based on a sample of 210 worldwide spinoff announcements in the period 1990 to 1998. A Positive return of 2.6 % (3-day Cumulative abnormal return) is reported, consistent with previous studies. The results are compared across geographic regions and between completed and pending spinoffs. Moreover, evidence is provided for improved focus, the tax-status of the transaction and relative size of the spinoff as predictors for the wealth gain from spinoffs.”

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