The Long-Run Performance of Sponsored and Conventional Spin-Offs

Authors


  • We would like to thank George Benston, Kose John, Paul Willensky, Bill Christie (the editor), an anonymous referee, and seminar participants at Emory University, New York University, and the European Financial Management meetings (2006) for helpful comments and suggestions.

Abstract

A sponsored spin-off takes place when an equity stake in a subsidiary is sold to an outside investor before going public. The stock return performance of a sample of 57 sponsored spin-offs from 1994 to 2005 is significantly negative over a three-year period following the spin-off date. The parent firms' stock performance for the year preceding (following) the spin-off date are below average (average) suggesting that their earlier performances were adversely affected by their subsidiaries and motivated the parents to spin them off. We also find that parent firms underinvest in the subsidiary prior to the spin-off, which could have motivated the subsidiary to seek outside funding sources before going public.

Ancillary