The Corporate Governance Scorecard - Testing an investment strategy focusing on spin-offs with strong corporate governance

Abstract: Seminar date: 03/06/2019 Course: BUSN79 Business Administration: Degree Project in Accounting and Finance, 15 credits Authors: John Kleven Falck and Sebastian Lindeborg Advisor: Håkan Jankensgård Key words: Spin-offs, agency theory, efficient market hypothesis, investment strategy, corporate governance, The Corporate Governance Scorecard Purpose: The purpose of this paper is to test an investment strategy investing solely in spin-offs with strong corporate governance to achieve superior abnormal returns Methodology: This paper designs and adopts a binary scorecard called The Corporate Governance Scorecard, which is used to create two groups of spin-offs with strong and weak corporate governance respectively. T-statistics have been adopted to test the difference in buy-and-hold abnormal return between the two groups. Moreover, OLS multiple regressions have been performed to analyse the individual variables of The Corporate Governance Scorecard Theoretical perspectives: Agency theory, the efficient market hypothesis, long-term wealth effect of spin-offs and factors explaining wealth effects of spin-offs Empirical foundation: The empirical foundation consists of 160 spin-offs completed in Western Europe between 2000 to 2015. For the spin-offs, return data, corporate governance data and financial data has been collected, resulting in a total of 2 720 data points Conclusions: The study concludes that the portfolio of spin-offs with strong corporate governance outperforms a group with weak corporate governance with mean abnormal return differences of 14.9, 35.0 and 42.1 percent for holding periods of one, two and three years. The difference is statistically significant at a five percent level for the two-year holding period and ten percent level for the three-year period. Further, two of out of the six individual corporate governance variables had a statistically significant relationship with abnormal returns