Spinning Gold: Unraveling the Secrets of Value Creation from Spin-offs

Abstract: This thesis explores the dynamics of value creation in American corporate spin-offs between 1995-2019 from the dual perspectives of the corporate focus and optimal leverage hypotheses. The research employs a comprehensive dataset of 164 cases, examining the impacts of spin-offs on long-term abnormal stock returns and both unadjusted and industry-adjusted operating performance. The results reveal contrasting stock market performance, with parent companies experiencing a significant long-term decline while subsidiaries gain from notable short-term abnormal returns. In terms of operating performance, the impacts are predominantly insignificant in the long run. While supporting evidence for the corporate focus hypothesis is observed, the results from the overall spin-off transactions challenge the findings of prior literature. Interestingly, the study uncovers that spin-offs with less difference in leverage between spun-off entities and their parent companies outperform their leverage-diversified counterparts, implying an inverse relationship to the optimal leverage hypothesis prediction. The findings contribute to the broader corporate finance literature, shedding new light on corporate spin-off value creation.