Learning about Internal Capital Markets from Corporate Spin-offs


  • Robert Gertner,

  • Eric Powers,

  • David Scharfstein

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    • Gertner is with the University of Chicago and NBER. Powers is with the University of South Carolina. Scharfstein is with the Massachusetts Institute of Technology and NBER. The authors thank seminar participants at the 1999 NBER Summer Institute, 2000 Eastern Finance Association Convention, Columbia University, London Business School, University of Chicago and University of South Carolina as well as Amy Dittmar, Jan Mahrt-Smith, Vikas Mehrotra, Ted Moore, Greg Niehaus, Henri Servaes, Anil Shivdasani, Jeremy Stein, René Stulz, and two anonymous referees for helpful comments.


We examine the investment behavior of firms before and after being spun off from their parent companies. Their investment after the spin-off is significantly more sensitive to measures of investment opportunities (e.g., industry Tobin's Q or industry investment) than it is before the spin-off. Spin-offs tend to cut investment in low Q industries and increase investment in high Q industries. These changes are observed primarily in spin-offs of firms in industries unrelated to the parents' industries and in spin-offs where the stock market reacts favorably to the spin-off announcement. Our findings suggest that spin-offs may improve the allocation of capital.