Shedding Light on Corporate Spinoff Operating Performance: A European Perspective

Abstract

A large body of evidence has documented positive stock-price announcement and long-term effects of corporate spinoffs. More controversial and substantially less investigated is the issue whether spinoffs produce ex post efficiency gains. Applying agency theory, our study of 102 spinoffs from 19 European countries occurring between 2002 and 2016 examines whether spinoffs generate actual improvements in operating performance of both the continuing parent, its spun-off child firm, and the combined parentchild portfolio. We test three hypotheses from previous market-based spinoff literature, the corporate focus hypothesis, the correction-of-a-mistake hypothesis, and the dual directorship hypothesis, to examine under which circumstances such improvements are maximised. Tracking changes in unadjusted and three adjusted measures of Return on Assets (ROA), we document no evidence of substantial improvements in the operating performance of the average parent-child portfolio, with the average child firm being associated with deterioration in operating performance in the first year following the spinoff. We find that only spinoffs of subsidiaries that operates in the same industry as their parents (non-focusincreasing) are the transactions that create significant average improvements in operating efficiency post spinoff, and that these gains are generated only at the child firm level and not within parent firms. Our study further reveals that the ‘origin’ of the spun-off child firm (formerly acquired or internally developed) has insignificant impact on the operating performance of the average parent, child firm, and parent-child portfolio. Furthermore, we find that the presence of one ‘dual director’, defined as board members from the parent firm simultaneously serving the board of the child firm, is associated with significant improvements in operating performance, and that this benefited the parents but not child firms. Finally, we document that the presence of multiple dual directors was detrimental for the average parent and the average child firm that is related to its former parent, but beneficial for the average child firm that is unrelated to its former parent.