Value Creation of European Spin-Offs: An empirical study of spin-off transactions from 1987-2016

Abstract

This thesis investigates the wealth effects of 127 European spin-offs that were conducted between 1987 and 2016. The wealth effects are investigated through extensive analyses on the announcement effect, long-run abnormal returns and operating changes, respectively. The analysis of the announcement effect documents that parent firms experience positive cumulative abnormal returns in the days around the announcement date of spin-offs, which is consistent with the broad consensus in academic literature. The pre-transaction level of information asymmetry is found to have a positive impact on the abnormal announcement returns. Similarly, the relative size of the spin-off firm compared to the parent firm is documented to have a positive impact. On the other hand, industrial focus is found to have no significant impact on the wealth of the shareholders, which contradicts most theoretical arguments and the existing European findings by Veld and Veld-Merkoulova (2004). The long-run abnormal returns for the pro-forma combined firms are documented to be insignificantly different from zero, which indicates that the announcement effect captures the full wealth effect of spin-offs. This is consistent with the efficient market hypothesis. Furthermore, parent firms are found to experience insignificant changes in adjusted ROA in the years following the spin-offs. This might partially be explained by the findings from the announcement analysis, documenting that the level of pre-transaction information asymmetry is a more important determinant in explaining shareholder wealth than industrial focus. If spin-offs are mostly driven by increasing the transparency of the firm, no operating changes are to be expected. The finding of information asymmetry being a more influential factor than industrial focus is rather surprising as improvement of corporate focus is frequently cited as the main motivation for conducting spin-offs