Unlocking Value: An Empirical Analysis of Corporate Spin-offs and Their Impact on Shareholder Wealth

Abstract

This thesis investigates the wealth effects of 127 European spin-offs that were conducted between 1987 and 2016, offering a comprehensive exploration of both short-term announcement effects and longterm wealth implications. The research begins by asserting a positive market reaction to spin-off announcements, aligning with prior studies, and showcasing statistically significant cumulative abnormal returns (CAAR) during specific event windows. Notably, the immediate impact of the announcement results in a robust CAAR, exceeding 3.5% in event windows t-3 to t+3 and t-5 to t+5, gradually declining to 2.80% by t-10 to t+10. However, the long-term analysis through the analysis of Buy-and-Hold Abnormal Returns (BHAR) introduces nuanced patterns. For parent firms, while there's a modest increase in abnormal returns over the initial 6-month period and substantial gains at 1 and 2 years, a notable decline at the 3-year mark challenges the sustainability of these trends. The absence of statistical significance suggests that observed patterns may be random fluctuations, resonating with the Efficient Market Hypothesis (EMH). Similarly, subsidiary shareholders experience gradual improvement over 2 to 3 years, with noteworthy gains, however lacking statistical significance, implying caution in interpreting these positive trends. The pro-forma combined firms exhibit positive trends over 1 and 2 years, yet the absence of statistical significance emphasizes potential randomness in these patterns. These long-term complexities underscore the complex interplay of market forces, managerial strategies, and shareholder sentiments as well as methodological challenges in measuring long-run abnormal returns. The findings contribute valuable insights into the value creation dynamics of spin-off transactions, prompting further investigations into industry-specific nuances and behavioral aspects. The thesis underscores the need for a nuanced understanding of the long-term effects of spin-offs, going beyond immediate market reactions to comprehend the enduring implications for various entities within the corporate landscape.