The Choice Between Spin-offs and Sell-offs

Spin-offs and sell-offs are alternative methods for divesting assets, but the effects on the parent firm differ substantially. We examine firms' characteristics that may influence the asset divestiture choice between a spin-off and sell-off. Results of the analysis indicate that the primary factors influencing the choice of divestiture type are financial distress, number of directors on the board, whether the CEO is also the Board Chair, and the size of the unit divested.     

Additional Evidence on the Relation Between Divestiture Announcements and Shareholder Wealth

This paper presents estimates of the effect of voluntary divestiture announcements on shareholder wealth. The results show that both spin-off and sell-off announcements tend to have a positive influence on the stock prices of the divesting firms, and that the spin-offs “outperform” the sell-offs on the day of the event. We also find that the economic gains to the shareholders of the selling and acquiring firms are nearly identical, suggesting that the sell-off decision is perceived by both investor groups as a positive net present value (NPV) transaction.     

Divisional Informativeness Gap and Value Creation from Asset Sales

Nanda and Narayanan (1999) show that the information asymmetry between the managers and market participants regarding divisional cash flows helps explain the value creation on asset sales. Based on their theoretical framework, the divisional informativeness gap hypothesis predicts that the announcement‐period return increases with the difference in cash‐flow informativeness of retained and divested divisions prior to the divestiture. Our results, using industry‐average earnings response coefficient as a proxy for cash‐flow informativeness of a division, support this prediction. The effect is stronger when a conglomerate retains the division with relatively greater growth opportunities.     

Corporate Restructurings: A Comparison of Equity Carve-outs and Spin-offs

In this paper we examine divisive corporate restructurings in which a firm takes a subsidiary public. Using a sample of 64 spin-off and 76 carve-out firms during 1991–1997, we find firms carve-out subsidiaries with higher market demand. These subsidiaries are more frequently in related industries than spin-offs. The carve-out firms are also more likely to be cash constrained and have lower marginal tax rates, but are not likely to be considering financial reporting synergies when structuring the divestiture. These results provide evidence that factors impacting the divestiture choice related to Master Limited partnerships, as studied previously, differ when divesting a corporate subsidiary.     

THE CORPORATE SELL-OFF DECISION OF DIVERSIFIED FIRMS

In this paper I explore the determinants of the corporate sell-off decision of diversified firms during the 1980s. The literature on sell-offs suggests performance, debt, number of operating segments, and level of ownership by officers and directors may play a role in the decision by firms to sell off assets. Empirical results show the probability of a sell-off is significantly negatively related to firm performance, significantly positively related to debt, significantly positively related to the number of business segments, and significantly negatively related to the level of officer and director ownership.     

The Timing and Substance of Divestiture Announcements: Individual,Simultaneous and Cumulative Effects

This paper examines differences in announcement day effects among firms engaged in voluntary sell-offs. While, on average, an initial sell-off announcement results in a significant positive excess return, not all divestiture announcements are accompanied by positive price movements. Dividing the sample into two subsamples based on whether the transaction price is announced shows that the announcement day effect is significantly positive for the price group but not statistically different from zero for the no-price group. In addition, a positive relation is found between the relative size of the sell-off and the announcement day return.     

EXCHANGEABLE DEBT CALLS AND SECURITY RETURNS

Exchangeable calls are not convertible into the calling firm's common stock but into the common stock of a target firm in which the calling firm has an ownership position. In addition to reducing leverage, exchangeables change the asset composition of the calling firm through the divestiture of the calling firm's ownership stake in the target firm. In contrast to the evidence on convertible calls, our findings indicate that announcements of exchangeable debt calls are not associated with an abnormal capital loss for the calling firm shareholders. For target firms, announcements of exchangeable calls reduce shareholder wealth. A lower probability of takeover resulting from diffusion of ownership concentration of the target firm's common stock may contribute to this result.     

A Relook into the Impact of Divestitures in the Presence of Agency Conflicts: Evidence from Property Subsidiary Sell-Offs in China

We analyze property subsidiary sell-offs in China to examine her market reaction to firms’ divestiture decisions. Overall, the response from the stock market is neutral. However, detailed analysis reveals that the market reacts differently to property subsidiary sell-off announcements by state-owned enterprises (SOEs) and non-SOEs. Consistent with findings from extant literature, we find statistically positive market returns associated with non-SOE sell-off announcements. However, we find statistically negative market returns associated with SOE sell-off announcements. We suggest that this divergent market reaction is influenced by the institutional feature of the Chinese market and is consistent with the high agency costs associated with state ownership.     

Optimal Incorporation, Structure of Debt Contracts, and Limited-Recourse Project Financing

We analyze the interrelationships among the corporate organization structure, the capital structure, and the ownership structure of a firm with multiple projects, when incumbent management derives control benefits. The choices made by firm management are: (1) Whether to set up projects as a joint firm or as separate firms (spin-off), (2) the amount of debt financing to use, (3) the structure of the debt contract (e.g., straight debt on the joint firm, limited-recourse project financing, or spin-off with straight debt), and (4) the fraction of equity to hold in each firm (ownership structure). Differences in managerial ability across projects, benefits of control, and the probability of loss of control through a takeover or through bankruptcy are driving factors in this model. We relate the project characteristics to the optimality of spin-offs and limited-recourse project financing arrangements, and derive implications for the allocation of debt and the ownership structure across projects.Journal of Economic LiteratureClassification Numbers: G32, G34, D21.     

On Corporate Divestiture

This paper investigates why firms choose to divest their units/segments, and how firms choose among the three divestiture mechanisms (equity carveout, spinoff, and asset selloff). A direct comparison is conducted on firms viable choices on a comprehensive sample of corporate divestiture transactions in the period of 1985-1998. Our multinomial logit analysis provides a complete picture on corporate divestitures. We find that, in support for the focusing hypothesis, highly diversified firms are more likely to divest units when suffering from low operating efficiency. Our results are also consistent with the proposition that firms are divesting to relax their credit constraint, as firms with higher leverage ratios and low cash income are more likely to engage in carveouts or selloffs. We find limited evidence of information asymmetry as the major determinant of divestitures. We provide new findings on firms choice among the three divestiture options. We report that, conditioned on the decision to divest, firms mainly use asset selloffs in divesting smaller units operating in the same industry. Firms with larger divested units are more likely to use spinoff or carveout transactions. Parent firms having high revenue growth, high book-to-market ratio, and divesting unit when market sentiment is high are less likely to use spinoffs. Firms having high dividend yield, less information asymmetry, and divesting units operating in different industries are more likely to use carveout as an exit mechanism. Alternative specification of an ordered logit analysis generates consistent findings.JEL Classification: G34     

Restructuring Using Operating Asset Exchanges: Issues and Evidence

This study examines restructuring in which a firm divests an operating asset in exchange for another operating asset. Since liquidity, capital structure, and distributional issues are not immediately associated with tax‐free asset‐for‐asset exchanges, they are well suited for examining the competing hypotheses related to divestitures. We find that the abnormal returns associated with asset exchanges are generally smaller than those associated with other divestiture restructurings except when indications of value are provided. Our analysis identifies positive valuation effects for firms undertaking focus‐enhancing exchanges, but a dominating consideration is whether the value of the units traded is indicated.     

The market for interfirm asset sales: Partial sell-offs and total liquidations

We investigate the valuation consequences of voluntary proposals to sell part or all of a corporation's assets. For partial sell-offs, successful sellers and buyers reap statistically significant abnormal returns of 1.66% and 0.83%, respectively. Unsuccessful sellers realize gains at the bid announcement of 1.41% that are lost at the offer termination. In contrast, proposals to liquidate the firm are associated with significant average abnormal returns of 12.24%. We interpret these findings as evidence that asset sales are associated with the movement of resources to higher-valued uses rather than as evidence of market mispricing before the divestiture announcements.     

Cash holding and control-oriented finance

We critically reassess the notion that high liquid asset holding by firms faced with weak investor protection is evidence of managerial rent extraction. We show that firms facing agency problems may establish tight controls over management through concentrated ownership. Using data on Belgian listed firms between 1991 and 2006, we find a strong positive association between ownership concentration and cash holding. This indicates a precautionary motive on the part of the controlling shareholders who highly value control. We also find that firm market valuation is positively affected by the amount of cash held by firms. On the other hand, managerial ownership has no impact. These results are consistent with the hypothesis that firms' owners are pursuing a rational strategy to mitigate agency costs in the face of weak investor protections.     

Beatrice: A Study in the Creation and Destruction of Value

This paper chronicles the history of the Beatrice company from its founding in 1891 as a small creamery, through its growth by acquisition into a diversified consumer and industrial products firm, and its subsequent leveraged buyout and sell-off. The paper analyzes the value consequences the firm's acquisition and divestiture policies, its organizational strategy, and its governance. The analysis sheds light on a number of issues in organization theory, strategy, and corporate finance, including the sources of value in diversifying aquisitions, the cost of over-centralization and weak corporate governance, and the mechanisms of value creation in the market for corporate control.     

Corporate cash holdings: Evidence from Switzerland

This paper investigates the determinants of cash holdings for a comprehensive sample of Swiss non-financial firms between 1995 and 2004. The median Swiss firm holds almost twice as much cash and cash equivalents as the median US or UK firm. Our results indicate that asset tangibility and firm size are both negatively related to corporate cash holdings, and that there is a non-linear relationship between the leverage ratio and liquidity. Dividend payments and operating cash flows are positively related to cash reserves, but we cannot detect a significant relationship between growth opportunities and cash holdings. Most of these empirical findings, but not all of them, can be explained by the transaction costs motive and/or the precautionary motive. Analyzing the corporate governance structures of Swiss firms, we document a non-linear relationship between managerial ownership and cash holdings, indicating an incentive alignment effect and an opposing effect related to increasing risk aversion. Finally, our results suggest that firms in which the CEO simultaneously serves as the COB hold significantly more cash.

Changes in corporate governance: Externally dictated vs voluntarily determined

Using the 2003 SEC regulations (following the Sarbanes–Oxley Act) on board independence as an identification for externally imposed governance changes, I compare its influence on firm performance to the effect of voluntarily conducted adjustments. I use publicly listed US firms between 1998 and 2009. In a triple-difference (dif-in-dif-in-dif) analysis setting, I explicitly interact the dictated change in board independence with the identifiers of the shock and non-compliant firms. Controlling for companies with voluntary changes, firms forced to modify their governance by increasing board independence experience a decrease in ROA, asset turnover, and sales growth. Testing the joint influence of dictated and voluntary adjustments in board independence on performance through a cross-sectional logistic-regression model, and controlling further for potential endogeneity through an instrumental variable (IV) regression model, I obtain consistent results. The findings are robust for other mandated provisions and stronger for bigger changes; small, single-segment firms operating in wholesale, retail, and high-tech industries; and constrained companies with financial distress, high leverage, low cash, high volatility, high growth and R&D expenses.     

自由现金流量创造力与违约风险——来自A股公司的经验证据

本文基于我国A股上市公司数据,研究了企业自由现金流量创造力与违约风险之间的关系。研究发现：(1)企业自由现金流量创造力越强,其违约风险越低。经过一系列稳健性检验后,该结论依旧成立。(2)自由现金流量创造力越强的企业往往有更低的债务规模、更高的资产收益率和更低的股票波动,因而其违约风险更低。(3)自由现金流量创造力与违约风险的负相关关系,主要存在于货币政策紧缩时期以及外部信息环境较差的企业。本文发现意味着,监管部门和投资者应重视上市公司自由现金流量创造力不足所带来的潜在债务违约风险,通过不断提高公司自由现金流量创造力,助力我国宏观经济与微观企业高质量发展。     

Market Valuation Effect of Foreign Asset Divestitures in an Emerging Economy: Korean Evidence

We find evidence that foreign asset divestitures announced by Korean listed firms lead to a decrement in firm value. Interestingly the divestiture announcements by firms with a large proportion of institutional investors, who hold advanced professionalism in stock investments, contribute to an increment in firm value, but ones by firms with a large proportion of individual investors lead to a decrement in it. Unlike the case of firms in advanced countries, our distinctive finding that the divestiture announcements produce a decrement in firm value around the announcement day sheds new lights on market valuation effects of foreign asset divestitures of firms in other emerging economies.     

Security price reactions around corporate spin-off announcements

We examine security price reactions around the announcements of 123 voluntary spin-offs by 116 firms between 1963 and 1981 involving a pro-rata distribution of the common stock of a subsidiary to the stockholders of the parent firm. The median spin-off in the sample is 6.6% of the original equity value and is associated with an abnormal return of 7.0% from 50 days prior to the announcement through completion of the spin-off. No evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders. Over the entire event period we find positive gains for firms engaging in spin-offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and/or regulatory difficulties. In the two-day interval surrounding the first press announcement we find positive average excess returns for all groups.     

Sources of Corporate Financing and Operating Performance: The effects of strategic ownership and financial restatements

Using a sample from European markets this study documents that changes in external financing, both in the form of equity and debt, can predict future operating performance (profitability and cash flows). In terms of future profitability, increases in equity (debt) financing particularly benefit large-size growth firms (large-size value firms). It is notable that a firm environment of low information quality, indicated by the presence of accounting restatements, intensifies the association between external financing and operating performance, due to the heightened scrutiny investors/lenders apply to firms that have recently restated their financials. In addition, strategic ownership in the firm has no significant effect on the financing – operating profitability association but may amplify the positive effects of equity financing on future operating cash flows. Moreover, financial analysts' forecasts of operating profitability and operating cash flows reflect the impact of external financing changes on future operating performance but exhibit a financing-related systematic inefficiency particularly for firms that have recently announced a material restatement of their prior financial results. Finally, controlling for information contained in analyst forecast surprises, the market is efficient overall and incorporates the effects of equity and debt financing changes into stock prices.