Voluntary Divestitures and the Choice Between Sell-Offs and Spin-Offs

A voluntary divestiture may either be a sell-off or a spin-off. In a sell-off, the divesting firm receives cash (or cash equivalents) and gives up ownership and control of the divested asset. In a spin-off, the divested asset becomes an independent entity under a new management but ownership remains with the old stockholders of the original firm. The study investigates the divestiture decision and the choice between sell-offs and spin-offs by constructing a model of the multi-divisional firm. The results show that firms undertake voluntary divestitures because of low marginal return coupled with high joint operating and financial costs. The form of the divestiture is determined by the operating risk of the division being divested. The implications of the model are empirically tested for the period 1969–87 and the results support the postulates of the model.