Value creation from corporate restructuring
Wealth effects and value channels of European spin-offs over 1998-2007
Master Thesis Financial Management
Faculty of Economics and Business Administration, Tilburg University
Name:
ANR:
J.J.T.M. Zegers
722085
E-mail:
Supervisor:
[email protected]
Dr. M.F. Penas
Date:
Code:
Department:
07-09-2010
390304
Finance (FEB)
Master Thesis Financial Management
Value creation from corporate restructuring
Abstract
This master thesis investigates shareholder wealth effects of European spin-offs in the period 1998
until 2007. The sample consists of 131 spin-off events from 14 different European countries. The
results show that in 50% of all cases, shareholders of parent firms face positive wealth effects around
the announcement date of a European spin-off. The cumulative average abnormal return over a threeday event window is positive and statistically significant with a magnitude of 2.90%. This result is
strongly in line with recent studies for the US. The results in this thesis show also that shareholders are
not better off within one –and two years after a spin-off transaction since returns in excess of matching
firms are strongly insignificant for parent, off-spring and pro-forma combined firms. Nevertheless,
managers whose remuneration package is linked to the operating performance of the firm may benefit
substantially from a spin-off transaction. As it turns out in this thesis, the long-run operating
performance in terms of return on assets (ROA) will be improved following spin-offs with magnitudes
of 2.20% and 2.94% for the one –and two year period respectively. Seven value channels through
which shareholder wealth might be created in European spin-offs are examined: improvement of
corporate focus, reduction of information asymmetry, improvement of geographical focus, impact of
corporate governance, the relative size of the spin-off, the timing effect of spin-offs and the presence
of a takeover threat prior to the spin-off announcement. The results in this thesis imply a clear
outperformance in short-run abnormal returns for focus-increasing spin-offs (4.73%) compared to nonfocus-increasing spin-offs (-1.15%). In contrast to the findings by Veld and Veld-Merkoulova (2004),
the results in this thesis show that the level of information asymmetry prior to the spin-off
announcement is an important determinant in explaining shareholder wealth effects. Furthermore, bigsized spin-off transactions (7.58%) are involved with substantial higher short-run abnormal returns
than small-sized spin-off transactions (0.17%). European spin-offs involved with the presence of a
takeover threat prior to announcement (6.72%) trigger substantially higher shareholder wealth effects
than spin-off transactions without such kind of indication (1.57%). The empirical analyses in this
thesis present that the next potential value channels seem to have no impact on shareholder wealth
effects in the short-run: the improvement of geographical focus, the impact of corporate governance
and the timing of spin-offs. However, the peer analysis in this paper shows that an improvement of
geographical focus is the only relevant determinant in explaining shareholder wealth effects in the
long-run. Obviously, parent firms will be confronted with reduced economies of scale in the long-run
in ensemble with main competitors whom operate internationally on large scale.
JEL classifications: G14, G32, G34, G35, D82.
Keywords: Spin-offs, Corporate restructuring, Event study, Long-run excess returns, Operating
performance, Value creation.
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Value creation from corporate restructuring
TABLE OF CONTENTS
1. Introduction ...................................................................................................................... 6
1.1 Background and motivation ...........................................................................................................6
1.2 Research problem and objectives ...................................................................................................8
1.3 Structure of the thesis .....................................................................................................................9
2. Theoretical framework of spin-offs ................................................................................................10
2.1 Definition and characteristics of spin-offs....................................................................................10
2.2 Divestiture waves and the march of spin-offs ..............................................................................12
2.3 Factors that might explain the wealth effects from spin-offs ......................................................13
2.3.1 Improvement of corporate focus.......................................................................................15
2.3.2 Reduction of information asymmetry ..............................................................................17
2.3.3 Improvement of geographical focus ................................................................................19
2.3.4 Impact of corporate governance ......................................................................................20
2.3.5 Tax implications ..............................................................................................................21
2.3.6 Wealth transfers from bondholders to shareholders ........................................................21
2.3.7 The size of spin-offs .........................................................................................................22
2.3.8 The timing effect of spin-offs ...........................................................................................23
2.3.9 The presence of a takeover threat prior to the spin-off announcement.............................23
3. Literature review ............................................................................................................ 25
3.1 Shareholder wealth effects around the announcement period ......................................................25
3.2 Long-run abnormal returns ...........................................................................................................26
3.3 Changes in operating performance ...............................................................................................28
4. Hypotheses ........................................................................................................................................30
5. Data description and methodology .................................................................................................34
5.1 Data description ............................................................................................................................34
5.2 Proxies ..........................................................................................................................................37
5.3 Methodologies ..............................................................................................................................39
5.3.1 The event study methodology...........................................................................................39
5.3.2 The methodology for calculating long-run abnormal returns ...........................................41
5.3.3 The change in operating performance methodology ........................................................43
6. Empirical results...............................................................................................................................45
6.1 Announcement period abnormal returns ......................................................................................45
6.2 Analysis of short-run wealth effects .............................................................................................46
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Master Thesis Financial Management
Value creation from corporate restructuring
6.2.1 Cross-sectional tests .........................................................................................................46
6.2.2 Regression analyses ..........................................................................................................58
6.3 Long-run abnormal returns ...........................................................................................................66
6.4 Analysis of long-run value effects ................................................................................................68
6.5 Changes in operating performance ...............................................................................................70
7. Discussion and conclusions ..............................................................................................................73
7.1 Interpretation of the results ...........................................................................................................73
7.2 Limitations and suggestions for further research..........................................................................79
7.3 Acknowledgements ......................................................................................................................81
References .............................................................................................................................................82
LIST OF TABLES
Table 1. Existing studies on wealth effects associated with spin-off announcements ...........................25
Table 2. Long-run stock market performance ........................................................................................27
Table 3. Summary of the hypotheses as treated in this thesis ................................................................33
Table 4. Overview of spin-off events by announcement year and country ............................................35
Table 5. Descriptive statistics about the market values of the parent firms and off-spring firms ..........36
Table 6. Final sample distribution by industry groups ...........................................................................36
Table 7. Potential value channels and related variables .........................................................................38
Table 8. Country-specific benchmarks ...................................................................................................40
Table 9. Short-run abnormal returns ......................................................................................................45
Table 10. Cross-sectional tests…./….corporate focus on short-run wealth effects................................47
Table 11. Cross-sectional tests…./….information asymmetry on short-run wealth effects ...................48
Table 12. Cross-sectional tests…./….geographical focus on short-run wealth effects ..........................50
Table 13. Cross-sectional tests…./….corporate governance on short-run wealth effects ......................52
Table 14. Cross-sectional tests…./….spin-off size on short-run wealth effects ....................................54
Table 15. Cross-sectional tests…./….timing on short-run wealth effects ..............................................55
Table 16. Cross-sectional tests…./….spin-off announcement on short-run wealth effects ...................57
Table 17. Univariate regression results…. /…abnormal returns for (completed) spin-offs ...................59
Table 18. Correlation matrix for independent variables .........................................................................62
Table 19. Multivariate regression results…./….abnormal returns for (completed) spin-offs ................63
Table 20. Long-run abnormal returns of parent, off-spring and pro-forma combined firms .................67
Table 21. Multivariate regression results of long-run abnormal returns: parent firms ...........................69
Table 22. Changes in operating performance after the spin-off date: parent firms ................................71
Table 23. A comparison of the conclusions…./….with existing European and American studies .......78
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Value creation from corporate restructuring
LIST OF FIGURES
Figure 1. Structure of a spin-off .............................................................................................................10
Figure 2. The event study time frame .....................................................................................................39
Figure 3. Short-run cumulative average abnormal returns around the spin-off announcement day ......46
Figure 4. The development of short-run…./….around the spin-off announcement day ........................48
Figure 5. The development of short-run…./….based on the normalized earnings forecast error ..........50
Figure 6. The development of short-run…./….geographical-improved spin-offs .................................51
Figure 7. The development of short-run…./….low –and high shareholder protection ..........................53
Figure 8. The development of short-run…./….big sized spin-offs and for small sized spin-offs ..........54
Figure 9. The development of short-run…./….spin-offs executed during cold markets .......................56
Figure 10. The development of short-run…./….spin-offs without a takeover threat ............................58
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Master Thesis Financial Management
Value creation from corporate restructuring
1. Introduction
1.1 Background and motivation
Economic shocks to the corporate environment might give rise to several organizational inefficiencies.
This has recently been occurred during the credit crisis when many firms in Europe tend to restructure
their businesses to a more ‘back to basics’ approach to become more transparent for its stakeholders
(Cockshott and Zachariah, 2009). A common way for firms to serve their stakeholders in this
perspective is to spin-off the number of business units with poor strategic fits and to switch over to a
more focus strategy toward its core business activities. A (corporate) spin-off is defined as a pro-rata
distribution of the shares belonging to the divested firm (off-spring firm) to the shareholders of the
parent firm (Allen, 2001). The spin-off transaction does not raise any cash for the parent firm and both
firms will operate independently in the future. Nevertheless, shareholders will obtain shares in the
parent firm as well as in the off-spring firm after the spin-off is completed. Over the last decades, spinoffs have become a commonly used divestiture strategy in the United States (U.S.), but it is scarcely
applied in Europe (Veld and Veld-Merkoulova, 2004). However, the increased need for corporate
transparency as caused by the credit crisis illustrates how Spin-offs has recently gained popularity in
Europe. An appropriate example is the announced spin-off by the ING Group (N.V.) willing to spinoff the banking activities from the other activities of the ING Group, such as the insurance activities1.
In the last decade, the ING Group has become a world player in the banking industry mainly achieved
by huge acquisitions all over the world. The ING Group became a so called ‘too big to fail’ company
and one of the lessons learned from the recent credit crisis is the limited transparency of the ING
Group’s business portfolio to its stakeholders. As a consequence, the ING Group needed a large
capital injection from the Dutch government to survive during the high times of the credit crisis. By
this, the profitable (and mainly unrelated) insurance activities of the ING Group were rescued as well.
Under pressure of the European Commission, the ING Group decided accordingly to undertake a spinoff transaction to restructure its businesses more strategically and geographically. Jan Hommen
announced on October 27th 2009 that the company is willing to spin-off its insurance activities2. Jan
Hommen made the following words:
“The package of changes that we present today is a clear plan to solve all uncertainties affected by the credit
crisis and to herald a new epoch for the ING Group. We are making a decisive move to turn ourself into a simple
and transparent organization.” (Reuters)
After the press release, the ING Group’s share price rose substantially. Due to (fundamental) finance
theory explains that arbitrary chopping a firm into pieces cannot affect its value, there must be some
1
The ING Group N.V. is listed on the Amsterdam Stock Exchange (AEX). The insurance activities of the ING
Group N.V. are bundled and well-known as ‘Nationale Nederlanden Verzekeringen’.
2
Jan Hommen is the Chief Executive Officer (CEO) of the ING Group.
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Value creation from corporate restructuring
value consequences in them (Ross, Westerfield and Jaffe, 2005). Moreover, a divestiture can be
assumed as a mirror image of a merger or acquisition. From academic research it is quite clear that
mergers and acquisitions are generally associated with positive wealth effects (Martynova and
Renneboog, 2006). Hence from first insight it is counter-intuitive that a spin-off transaction can create
value but several previous American studies such as from Daley, Mehrotra and Sivakumar (1997)
report positive abnormal returns ranging between +2.5% and +4.5%. Empirical research on spin-offs
has revealed a great deal about shareholder wealth effects from 1980 up to now. But, the most of these
studies are related to the United States while relatively few studies have been reported with respect to
wealth effects associated with European Spin-offs (Veld and Veld-Merkoulova, 2004). It can be
claimed that results from a U.S. perspective will also be valid for European countries but there are at
least two important reasons to assume that this claim might be questionable (Goergen and Renneboog,
2002). First, Continental-European firms are more bounded to a civil law while firms in the U.S. and
U.K. aim for a common law. In Anglo-Saxon countries, managers are more focused on shareholder
value creation where in Rhineland countries a mix of stakeholders are taken into account. Since La
Porta et al. (1998) claim that investors with a common law have the strongest legal protection, higher
abnormal returns at the announcement of a corporate restructuring, such as a spin-off, can be expected
in Anglo-Saxon countries than in Rhineland based countries3. Secondly, in contrast to American
studies, authors like Veld and Veld-Merkoulova (2004) report insignificant abnormal long run returns
for European spin-offs. While reasons for these differences between American and European studies
remain unclear, the authors claim that the European capital market might be more efficient than its
U.S. counterpart. Obviously, available information is rather entirely incorporated in the value effect of
European spin-offs at the announcement date.
There is a large body of empirical literature on spin-offs, primarily based on abnormal returns
associated with the announcement of spin-offs (Boreiko and Murgia, 2010). In the empirical literature
exists a broad consensus that American spin-offs create value in the short-run. However, long-run
studies on shareholder wealth effects by spin-offs are more limited. Beyond the fact that a lot of longrun studies face statistically insignificant problems, recent studies do not show unambiguous
consensus whether the value is positive or negative in the long-run (Veld and Veld-Merkoulova,
2004). Moreover, a mixed consensus exists towards the channels through which value might be
created in a spin-off transaction. For instance, an important value channel as mentioned in academic
literature is the increase in corporate focus; authors like Krishnaswami and Subramaniam (1999), and
Desai and Jain (1999) claim positive shareholder wealth effects in the short-run. On the other hand,
several value channels are more uncertain. Schipper and Smith (1983) claim that value creation may
come from enhanced managerial efficiency as well as from tax and regulatory benefits while Daley,
3
Shareholders in common law countries may benefit more than shareholder in civil law countries from a spin-off
transaction since they are better protected when changes in the corporate structure will occur. This will be
discussed in more detail in section 2.3.4.
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Value creation from corporate restructuring
Methrota and Sivakumar (1997) cannot confirm this statement. Furthermore, Boreiko and Murgia
(2010) claim in their paper new evidence on the positive association between a takeover threat prior to
a spin-off announcement and shareholder wealth effects. Therefore, more academic research on these
and more value channels is needed to draw reasonable conclusions for European firms. The increased
popularity for spin-offs fueled by the recent credit crisis, the limited number of academic studies on
European spin-offs, the ambiguities towards long-run shareholder wealth effects and finally the
uncertainties about the impact of several value channels play all a major role in the motivation of this
thesis
1.2 Research problem and objectives
The aim of this paper is to examine wealth effects and value channels for European spin-offs. In a
broad sense, there are two types of empirical studies measuring wealth effects involved in spin-offs.
One of these studies is from Daley, Mehrotra and Sivakumar (1997) based on changes in operating
performance. The idea is to compare the change in return on assets (ROA) of a portfolio consisting of
parent firms and off-spring firms with those of the pre-spin-off’s ROA and benchmark them to the
industry average. Another kind of studies, e.g. from Veld and Veld-Merkoulova (2004) is more
focused on existing finance theories and prefers to use stock market information to explain wealth
effects in spin-offs. The main idea in these finance related academic studies is that information is
immediately and perfectly incorporated in the share prices. Due to Desai and Jain (1999) explain that
both methods of measuring long-run performance posses its benefits and drawbacks, this paper will
take into account both methods.
As mentioned before, there are very few studies so far done with European data. Therefore,
this paper verifies the announcement effects for European spin-offs and tackles the differences in the
long-run. The main focus of this paper is in part based on Veld and Veld-Merkoulova (2004) and
Kirchmaier (2003) who examined both wealth effects and the channels through which value might be
created in European spin-offs. As a limitation, Veld and Veld-Merkoulova (2004) and Kirchmaier
(2003) did not treat a lot of other potential value channels which are claimed by recent American
studies on spin-offs. Accordingly, this paper will continue to build on their impressive work related on
European spin-offs to explain more value determinants and to build a stronger academic foundation.
The primary purpose of this thesis is to achieve an answer to the next dual research question:
Do European corporate spin-offs create shareholder wealth and through which channels is this wealth
created? The main objective of this paper is hence to examine wealth effects in European spin-offs
using both stock market reactions and accounting information. To enumerate, there are three sub
objectives in this paper. First, announcement effects of European spin-offs over 1998-2007 will be
examined. Secondly, value creation in the long-run from European spin-offs will be measured and be
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Value creation from corporate restructuring
compared to the main results from recent studies. Thirdly, the most important focus of this thesis is to
explain the value channels through which value can be created in European spin-offs.
1.3 Structure of the thesis
The remainder of this paper is as follows. Section 2 presents the theoretical framework of spin-offs. It
describes extensively what spin-offs are, it also presents a description of divestiture waves and the
march of spin-offs and finally the factors that might explain the wealth effects of spin-offs. Section 3
reviews the main findings from recent studies with respect to shareholder wealth effects in the shortrun as well as in the long-run. Accordingly, section 4 outlines the hypotheses that are based on the
theoretical framework and findings from recent studies as described in section 2 and 3. Next, a
description of the selected data and methodology will be given in section 5. Furthermore, section 6
presents the empirical results and its accompanying interpretation. Finally, section 7 will interpret the
results of the main findings in this thesis and it will provide limitations and recommendations for
further research.
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Value creation from corporate restructuring
2. Theoretical framework for spin-offs
This section describes spin-offs in a theoretical framework. First, some definitions and characteristics
of spin-offs will be quoted from academic papers. Next, a brief description about the history of spinoffs and divestiture waves in the last decades will be given. Finally, a variety of factors as mentioned
in academic literature that might explain the wealth effects from spin-offs will be presented.
2.1 Definition and characteristics of spin-offs
In academic literature, several definitions of spin-offs are often used interchangeably, but there is a
subtle difference between the used definitions (Tübke, 2005). Therefore, this thesis starts with
clarifying the confusion around the used definitions.
The term spin-off is usually associated with the establishment of a new independent corporate
entity that has a poor strategic fit with the core business activities of the parent firm. The majority
(often more than 80%) of the shares in the new corporate entity are then distributed on a pro rata basis
to the shareholders of the parent firm (Allen, 2001). However, Clarysse and Van de Velde (2006)
claim that this definition is not (entirely) correctly formulated based on at least two reasons. First, the
definition does not claim that the newly floated firm is separately valued in the stock market. Hence
additionally, a spin-off is a form of corporate restructuring in which the original firm is separated into
two firms, each with a separately traded stock. The newly floated firm now has an independent
existence and is apart listed on the stock exchange. The shares in the off-spring firm are distributed to
the shareholders of the parent firm, and so they own shares in both firms rather than just one (see
figure 1). This is exactly the reversal of a merger and therefore the term ‘demerger’ is often preferred
instead of ‘spin-off’ (Sudarsanam, 2003). Secondly, the definition as formulated by Allen (2001) does
not distinguish a spin-off from a splitoff. Formally, a spin-off is a completed
execution all at once in a 100%
Parent
Business
Unit
distribution to the shareholders of the
Parent
Offspring
parent firm. On the other hand, in a
split-off the parent firm retains a
Shareholders
Shareholders
minority stake (often less than 20%) in
the off-spring firm and distributes the
Figure 1: Structure of a spin-off.
majority shares to its shareholders. However, this distinction in terminology is important in the sense
that an off-spring firm remains highly dependent in the case of a split-off since the parent firm retains
a relatively large stake in that firm. As a consequence, the off-spring firm retains its corporate
governance regime after a split-off is undertaken, while in the case of a spin-off the off-spring firm can
benefit from a new corporate governance regime (Sudarsanam, 2003).
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Master Thesis Financial Management
Value creation from corporate restructuring
Dittmar (2004) adds that in contrast to other corporate restructuring methods such as an equity
carve-out or a corporate sell-off, a spin-off provides existing shareholders new claims on the off-spring
firm that they can choose to keep or sell but it will not raise any cash for the parent firm. Therefore, a
spin-off transaction is not a suitable restructuring method when a firm is experiencing financial
distress and needs to raise cash to mitigate bankruptcy (Rüdisüli, 2005).
Kirchmaier (2003) considers the pro-rata share distribution to the shareholders of the parent
firm as a non-cash ‘dividend’. This kind of dividend is treated as tax-neutral in many countries in
Europe since the magnitude of the ‘dividend’ is difficult to estimate (Tübke, 2005). However,
countries like France, Germany and Switzerland are an exception to this rule whereas spin-offs are
taxed in these countries. In the discussion whether spin-offs can be viewed as a kind of dividend,
Parhankangas and Arenius (2003) claim that spin-offs are sometimes confused with stock dividends.
There is however one major way in which the two differ. While both represent deductions from earned
surplus, the stock dividend does not diminish the firm’s assets, while a spin-off in kind does, namely,
by reducing the firm’s ownership in the shares of the corporate entity.
Tübke (2005) notices that the majority control after a spin-off is indeed shifted to new owners
leading to a high degree of independence for the off-spring firm but that in many cases a formal and
informal relationship between the parent and the off-spring still remains after separation.
Beyond the anomaly in academic literature about the definition of a spin-off, several different
types of spin-offs are quoted as well (Moncada et al., 2001). Two classification criteria are often used
to distinguish. The first criterion is based on the nature of the parent firm from which the spin-off is
undertaken. The second criterion divides spin-offs with respect to the motivation as underpinned for
the transaction.
The first criterion is based on the nature of the parent firm and roughly two types can be
classified. First, an ‘institutional spin-off’ has its origin in public institutions. The most well-known
institutional spin-off is a so called university spin-off and is often used to protect contributed
knowledge in a product by a patent. Institutional spin-offs have been proven to be very effective as the
knowledge generated in a university can be directly translated into commercial activities (Geenhuizen,
2009). Secondly, a ‘corporate spin-off’ is defined as the transfer of corporate resources, which forms
the basis for the operations of a new economic entity (Tübke, 2005). A spin-off from a state-owned
firm is assumed as a corporate spin-off as long as the parent firm competes in a competitive market.
Hence, in the case of an institutional spin-off, the activity of the parent firm is not subjected to market
competition. Since the main focus of this paper is on corporate restructuring, institutional spin-offs
will not be further mentioned in the continuation of this paper.
The second criterion divides spin-offs towards the principal motivation behind the spin-off
transaction and again two types can be classified. An ‘entrepreneurial spin-off’ is driven by one or
more employees of the parent firm who want to exploit an utilizable potential based on their
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Value creation from corporate restructuring
experience within the parent firm (Tübke, 2005). Entrepreneurial spin-offs are usually called
spontaneous spin-offs or pull spin-offs as well. In contrast, a ‘restructuring-driven spin-off’ is initiated
by the parent firm itself and is often undertaken due to restructuring or refocusing of activities (Elfring
and Foss, 2000). Business units that are not within the firm’s core activities and that do not meet the
minimum performance requirements are either spun-off. Since the origin of such kind of decision
comes from the management of the parent firm, a restructuring-driven spin-off can be regarded as a
top-down process (Tübke, 2005). In generally, the management of the parent firm provides active
support to the new owners of the off-spring firm. This is however in great contrast to an
entrepreneurial spin-off where the new owners of the off-spring firm do not receive support from the
parent firm and can even have to face resistance (Braaksma and De Jong, 2005).
2.2 Divestiture waves and the march of spin-offs
There is a large body of academic research on merger waves and a much smaller one on divestiture
waves (Qiu and Zhou, 2007). However, there is strongly academic consensus that mergers and
divestitures tend to occur in waves.
In the 1960s, the number of divestitures was relatively small compared to the total number of
global transactions4 (Subarsanam, 2003). This period was characterized by the introduction of
diversification as a new management concept to pursue risk reduction strategies. The idea behind this
strategy is that the earnings and cash flows of the firms become more stable and predictable after the
transaction as affected by the coinsurance effect. Therefore, the risk of bankruptcy should be reduced
and an increase of the firm’s debt level may enable the management to undertake new acquisitions
financed by large amounts of debt. The explosive merger wave came to an abrupt end following
changes in regulations and tax laws, along with a stock market decline (Gaughan, 2007). Firms then
began to reconsider some mergers which proved to be poor mergers. Due to a declining economic
trend and high levels of leverage, firms were forced to divest their divisions and so to improve their
cash flows. In the high times of the recession in 1975, the number of divestitures constituted 56% of
all global transactions (Subarsanam, 2003).
During the fourth wave in the 1980s, in fact two waves could be identified since mergers and
divestitures took place simultaneously. Divestitures constituted about 40% of all M&A activities
during that period (Subarsanam, 2003). This divestiture trend could be explained by tax incentives
facilitated in several countries like in the UK as well as by academic consensus that conglomerates
suffer from a conglomerate discount. Conversely, the relatively low stock prices created a lot of
acquisition opportunities for many cash-rich firms after the economic recession.
During the fifth merger wave of the 1990s, focus on the firm’s core competencies became a
more prominent business strategy (Daley et al., 1997). With other words, the resource-based view as
4
The 1960s are classified as the third merger wave. The terms ‘mergers’ and ‘acquisitions’ are used
interchangeably in this section.
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Value creation from corporate restructuring
competitive strategy in conglomerate firms became gradually less popular over time. While spin-offs
were already very attractive divestiture methods in the United States at the beginning of the 1990s,
spin-off transactions in Europe at that time were very scarcely. But from 1995 onwards, the number of
European spin-off transactions increased rapidly. This might be as with other financial concepts that
from the United States spills-over to Europe, it needs time due to many countries in Europe first had to
adapt some legal and tax regulations to facilitate such kind of transactions (Kirchmaier, 2003).
There are some reasons to expect a new divestiture wave in the near future as affected by the
recent economic downturn (Andrews et al., 2009). First, financial institutions have to become more
transparent about their credit portfolios to their stakeholders as it was one of the lessons learnt from
the recent credit crisis. Moreover, new legislation and improved supervision for financial institutions
enforce them to turn themselves into a simple and more transparent organization5. A spin-off is one of
the suitable possibilities to pursue such kind of operations. Secondly, due to the recent economic
downturn, many firms are experiencing bad financial results and are facing lower credit ratings.
Therefore, a divestiture is often inevitable to raise cash or to avoid eventual liquidation. Rather a
corporate sell-off or an equity carve-out should be used in this case since a spin-off as divestiture
method will not raise any cash. However, the future has to turn out whether the current credit crisis
will indeed lead to a new divestiture wave.
2.3 Factors that might explain the wealth effects from spin-offs
As with much modern finance theory, explaining wealth effects from spin-offs starts with the famous
Modigliani-Miller irrelevance proposition (1958). This proposition implies that in a perfect capital
market, issues like capital structure and dividends are irrelevant for firms since investors can replicate
on their own any choice made by the firm. Therefore, the value of a particular firm is solely
determined by the discounted cash flows as generated by its assets. This suggests that under the
Modigliani-Miller theorem (e.g. zero transaction costs, no information asymmetry and taxes) corporate
restructuring is irrelevant as well. At least two important implications from this theorem arise to this
thesis. First, firm value can neither be increased nor decreased by arbitrary chopping a firm into
pieces. Secondly, if it might be possible that spin-offs create significant wealth effects in the short -and
long-run, the channels through which value is created must come from the invalidity of the
Modigliani-Miller’s assumptions in the real world. Of course, it is not a surprise that practically all
European firms face taxes and deal with substantial market imperfections affected by informational
asymmetries, bankruptcy costs, regulations and transaction costs. In other words, whereas the
Modigliani-Miller theorem is a great starting point in the discussion about the corporate restructuring
relevancy, there is enough academic consensus to assume the existence of several potential value
sources from corporate spin-offs (Li and Li, 1996).
5
For instance, one of the requirements for the ING Group NV to obtain the capital injection from the Dutch
government (during the credit crisis) was to spin-off the banking activities from the insurance part.
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Master Thesis Financial Management
Value creation from corporate restructuring
Based on the limitations of the Modigliani-Miller assumptions (1958) in a realistic world,
there are at least three main academic foundations for the value creation in corporate spin-offs. The
first economic explanation comes from Coase (1937). He explains in the article: ‘the nature of the
firm’ his theorem about the rational choice between forming a firm and trading bilaterally through
contracts on a market. According to his theorem, this choice should mainly depend on the relative
transaction costs. Therefore, a corporate spin-off transaction can be assumed as beneficial when it is
inherent with a reduction in transaction costs. For instance, a share of a particular diversified firm
needs more ‘effort’ (and hence higher transaction costs) for shareholders to determine its fair value
then a (smaller) focused firm. The second explanation for value creation through corporate
restructuring is based on the theory of agency costs, managerial behavior and ownership structure as
described by Jensen and Meckling (1976). This theory describes the misalignment of interests between
insiders and outsiders and argues that corporate restructuring can facilitate better monitoring of
managerial behavior against lower monitoring costs. Accordingly, a higher level of monitoring will
put more pressure on the management and therefore an enhancement of firm performance can be
expected. The third explanation comes from Majluf and Myers (1984), where they claim that
management is assumed to know more about the firm’s value than potential investors. In a perfect
capital market, assets can always be floated at a fair price and the net present value of corporate
restructuring is always zero. However, Majluf and Myers (1984) asked themselves the question, ‘what
if the firm’s managers know more about the real value of its assets and opportunities than outside
investors do?’ As an answer, they argue that corporate restructuring can be viewed as an information
signal since insiders possess information which is unknown to the market. As a result, corporate
restructuring enables potential investors to better verify the quality and value of the assets which are
offered.
Considering the reasons above, the structure of a firm might have an important effect on its
value. Furthermore, several major sources of value creation in corporate spin-offs have been advanced
in academic literature. The most often cited sources are: improved corporate focus (e.g. Desai and
Jain, 1999), reducing information asymmetry (e.g. Krishnaswami and Subramaniam, 1999), increased
geographical focus (e.g. Veld and Veld-Merkoulova, 2004), impact of corporate governance regime
(e.g. Faccioa and Lang, 2002), tax implications (e.g. Tübke, 2005), wealth transfers from bondholders
to shareholders (e.g. Maxwell and Rao, 2003), size of spin-off (e.g. Miles and Rosenfield, 1983),
timing effect (e.g. Amesse et al., 2002). A relative new research topic is whether abnormal returns at
announcement are higher or lower for firms which are facing takeover threats prior to the spin-off is
undertaken. This is the so called corporate control hypothesis proposed by Chemmanur and Yan
(2004) who posit that spin-offs discipline management by increasing the firm’s exposure to the
possibility of a takeover threat. The next subsections will discuss these theoretical value sources in
more detail.
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Master Thesis Financial Management
Value creation from corporate restructuring
2.3.1 Improvement of corporate focus
As discussed in section 2.2, managerial preference for growth and the introduction of new
management tools to diversify management risks probably spurred the explosive conglomerate trend
during the 1960s wave. Roughly twenty years later, conglomerate firms fell into disrepute when a
number of academic studies (e.g. Rumelt, 1982) claimed that conglomerates suffer from a so called
‘conglomerate discount’ in stock markets. This reflecting the market’s perception that conglomerate
firms might generate substantially higher shareholder value as stand-alone business units.
Nevertheless, it is too premature to disapprove the power of conglomerate firms since even in
countries like the U.S. and the U.K. that have taken intensive ‘de-conglomeration’ operations, large
firms are still diversified (Sudarsanam, 2003).
The discussion whether conglomerate firms or unrelated diversification may create value is an
important issue within the field of corporate finance. A distinct body of academic literature has already
given attention to the diversification effect on firm value6. In this thesis, the attention will arise again
since spin-offs serve the opportunity to exploit the conglomerate discount and so resulting in positive
shareholder wealth effects. Therefore, a reasonable channel through which value can be created is by
an improvement of the firm’s industrial focus. Nevertheless, there are three main prevailing theories
which explain the value creation in conglomerate firms: increased market power, usefulness of internal
capital markets and advantages of the resource based view.
The market power theory describes the ability of a firm to exercise anticompetitive behavior
against potential entrants and current rivals in the market (Montgomery, 1994). This suggests that a
well diversified firm has the opportunity to compete in the market using predatory pricing. Saloner
(1987) describes predatory pricing as the cutting of prices in such a way to chase off competitors from
the market and providing a clear signal to blunt potential entrants. A considerable amount of academic
literature has been identified on how conglomerate firms might wield power in a competitive manner.
First, Cestone and Fumagalli (2001) claim the benefits of cross-subsidizing. A conglomerate firm can
adopt an initially loss-making pricing policy in a market in which one of its subsidiaries is competing
and finance this strategy with the cash flows it generates in its other markets. Once the competition is
decreasing over time and the conglomerate firm is able to consolidate its market power, it can switch
to a more monopolistic pricing policy and recover its incurred losses. Secondly, the theory that market
territory overlap can lead to mutual forbearance when firms compete in a variety of markets is
originally attributed to Simmel (1950). Accordingly, firms can choose not to compete aggressively
each other in one market to engage in soft competition in another market. A single business firm will
not relish such forbearance and may be driven out. Thirdly, Barton (1988) explains the opportunity
and benefits of reciprocal buying. A conglomerate firm (Y) might be in a stronger position than a more
focused firm to step into a reciprocal buying contract such that it agrees to purchase from firm X on
6
See for instance Lang and Stulz (1994), Berger and Ofek (1995) and Villalonga (2001).
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Master Thesis Financial Management
Value creation from corporate restructuring
condition that firm X purchase from Y as well. In the case that firm X is more diversified, it is more
likely that it can use firm Y’s products and as a result, other suppliers will be kept out. While the
market power theory logic is clear, there is very little empirical evidence of a relation between
diversification and anticompetitive behavior as described along the lines above7.
The market power theory undermines that some firms in industries with high growth opportunities
have sufficient value creation opportunities itself and for that reason facing low incentives to run
business under a conglomerate umbrella in order to offer its deep pockets to finance predatory pricing
policy (Boutin et al. 2009). Furthermore, mutual forbearance requires comparable strengths of
conglomerate firms in their overlapping markets, otherwise it is a costly bluff that will be quickly
noticed. However, Cardinal et al. (2000) claim that the occurrence of conglomerate firms with
comparable strengths is rather an exception than a rule. Similarly, size inequalities between
conglomerate firms in industries in which they intent to bundle strengths limits reciprocal buying and
selling. Hence overall, there is not so much support for the market power theory.
In a perfect capital market, firms should be able to raise capital to finance their projects that
will yield the investors’ expected returns (Carpenter and Petersen, 2002). Due to several market
imperfections or not well developed capital markets8, it can be valuable for a conglomerate firm to
take over this capital allocation function. This is especially true when a firm is financially constraint
and so facing a wedge between the costs of internal and external finance (Hubbard, 1998). The internal
capital market theory explains that the structure of a conglomerate firm improves the allocation of
capital to the most promising investments even when external capital markets fail. There are some
reasons supporting the powerfulness of internal capital markets. First, internal capital markets may
have the benefits of easier and stronger access to valuable information to assess the prospects of a
business unit that may be withheld from the external capital markets due to competition reasons (Fluck
and Lynch, 1999). Moreover, already made investments might be more adequate and less costly
monitored than by external capital markets9. Secondly, internal capital markets can be used gratefully
when conglomerate firms create possibilities for themselves to fund projects that the external market
would not finance for several reasons (Hainz, 2006). For instance, external capital markets are not
always able to take a long-term view of the attractiveness of a project or to invest in too risky projects.
Notwithstanding the described advantages of internal capital markets, it faces tension on several
fronts. The internal capital allocation policy is subjected to internal corporate politics and may be
largely influenced by the more influential people within the firm (Cremers et al., 2010). With as a
possible consequence, the misallocation of funds into relatively low or even value destroying projects
while high value projects are available to the firm. Furthermore, other kind of criticism is derived from
7
See for instance Comment and Jarrell (1995), Daley et al. (1997) and Montgomery (2004).
In this case, the infrastructure of services like banking, accounting and other legal services may be weak.
9
This argument is strongly in line with the pecking order theory (Majluf and Myers, 1984). It states that firms
prefer their sources of financing (internal above external) according to the principle of least resistance.
8
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Master Thesis Financial Management
Value creation from corporate restructuring
Jensen’s free cash flow theory suggests that managers enjoy private benefits of control such as perks
and empire building at the cost of the firm’s financial resources. Bhide (1997) claims that this problem
is less seriously in more focused firms than in conglomerate firms due to greater transparency and
better internal benchmarks. These control loss problems in conjunction with the conglomerate
structure diminish the relative attractiveness of the internal capital market relative to the external.
Finally, external capital markets have become more developed given the increased amount of
corporate disclosure and improved access to information technology in the last few years (Hauswald
and Marquez, 2006). Therefore, this development will reduce the attractiveness of internal capital
markets more over time and as a consequence supporting the apologists of more focused firms.
The resource based theory argues that a well diversified firm can benefit from a broad range of
existing resources and capabilities within its several business units (Penrose, 1959). Firm wide
knowledge that is accumulated in the development process of a product can be used effectively for
other products. Furthermore, Penrose (1959) asserts that firms can create value when excess capacity
in some production units cannot be sold at value. In that case, conglomerate firms can employ it useful
in other product lines where more focused firms face efficiency problems. However, Williamson
(1975) came up with a number of ‘Penrosean’ ex post limitations based on asset specificity and
bounded rationality. For instance that only a narrow range of physical and intangible resources can be
shared in practice and that replacement of superior managers is usually difficult.
The question now still remains whether the called benefits of conglomerate firms offset the
drawbacks and therefore resulting in a conglomerate premium. A majority of academic papers such as
from Comment and Jarrell (1995), Daley et al. (1997) and Berger and Ofek (1995) report a significant
conglomerate discount. Nevertheless, later studies by Villalonga (2004) and Rajan et al. (2000)10 draw
into question a possible discount by highlighting certain methodological shortcomings and even report
a conglomerate premium. Therefore, this thesis will present in sections 6 and 7 whether focus
increasing spin-offs, or say ‘back-to-basics’ operations, will lead to positive wealth effects for
shareholders.
2.3.2 Reduction of information asymmetry
The second channel through which value might be created comes from the work of Habib, Johnson
and Naik (1997). They use a model of asymmetric information between insiders and the market to
describe the impact of information vagueness on firm value. More diversified firms recognize that
outsiders are able to observe the accumulated cash flows of the entire firm but not the business units’
cash flows individually. As a result, a higher level of information asymmetry can lead to misvaluation
or even undervaluation of the firm’s securities. A spin-off can facilitate a mitigation of information
asymmetry since the shares of spun-off divisions are floated to the market separately and accordingly
10
Rajan et al. (2000) claim that 39.3% of the conglomerate sample was traded at a significant premium.
17
Master Thesis Financial Management
Value creation from corporate restructuring
disclose detailed information about the profit and cost structure of the new created corporate entity
through reporting statements11 (Nanda and Narayanan, 1999). Krishnaswami and Subramaniam (1999)
present several information based explanations why a spin-off can increase value. First, a spin-off as
divestiture method will not generate any cash for the parent firm but it could reduce the undervaluation
problem. Thus, an undervalued firm that strongly believes that it needs capital in the short-run should
first engage in a spin-off to obtain a fair market price for its shares and after that issue equity to raise
cash. Secondly, poor performing business units may push down the value of other more profitable and
efficient divisions. This can result in substantial undervaluation of the entire firm compared to the
aggregated fair value of all business units. Thirdly, Emmanuel and Mehafdi (1994) claim evidence of
manipulation in transfer pricing and management fees for firms which do not fully disclose
information on divisional level. Managers can manipulate certain cost items (e.g. management fees) by
labeling these costs as shared costs and then transfer across the various divisions. Finally,
Krishnaswami and Subramaniam (1999) also report an increase of earnings forecast accuracy after a
spin-off since the firm becomes more transparent and easier to value. In a similar way, Gilson et al.
(1999) document increased analyst coverage and analyst specialization following spin-offs.
Furthermore, they conclude that the increased forecast accuracy is significant related to an increase in
the number of analysts covering firms.
In their paper, Bardong et al. (2006) take into account different levels of information
asymmetry and claim that it is an important aspect in the discussion about the impact of divestitures on
shareholder wealth. They claim that there are three types of investors which are affected differently
after a spin-off is undertaken. The first type can be categorized as the smallest group of very well
informed corporate insiders. Due to their position within the organization, this group faces little firm
specific information asymmetry. Therefore, a spin-off will lead to relatively few wealth benefits for
this type of investors. The second type consists of investors who are well skilled in analyzing public
information but do not possess all relevant firm specific information. The third type is the worst
informed but likely the biggest group of investors, namely the uninformed public. They face
information asymmetry from the well informed corporate insiders (type 1) and skilled information
analysts (type 2). Bardong et al. (2006) claim that the latter type of investors will benefit the most
from a spin-off since they face relatively much more information asymmetry than type 1 and 2
investors.
While many academic papers claim consensus that spin-offs change the information
environment of firms into a more transparent way12, Huson and MacKinnon (2003) found two
arguments why spin-offs might increase the degree of intra-shareholder asymmetry rather than reduce
it. The first argument is based on the nature of private information and its relation to public
11
12
By means of 8K and 10K statements or trading updates.
See Krishnaswami and Subramaniam (1999), Kim and Verrecchia (1997) and Hasbrouck (1991).
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Master Thesis Financial Management
Value creation from corporate restructuring
information. On the other hand, the second argument is related to traders’ incentives to gather and act
on private information. The first argument implies that when investors have different likelihood
functions13, an executed spin-off can just increase information asymmetry. This is because investors
will value and interpret public available information quite differently. As a consequence, a conversion
of private information into publicly available information might even decrease analyst forecast
accuracy. The second argument is based on the model as presented by Gorton and Pennacchi (1993).
This model describes that well informed traders lose their information advantage when claims on
individual assets are restructured into composite claims. A spin-off can decompose these composite
claims and hence increase the informed traders’ relative informational advantage. This can be
explained since informed traders are likely to have information with respect to the value of some
business units that less informed traders do not have. After a spin-off, it is less likely that the
information advantage of informed traders will be offset by the change in the value of the business
units that were difficult to valuate a priori. Therefore, well informed traders have greater incentives to
collect and take action on information about firms that are more focused since that is were their private
information may result in the greatest value.
2.3.3 Improvement of geographical focus
A firm is not only able to improve its industrial focus but also to increase its geographical focus by
spinning-off a foreign division. An extensive number of academic papers shows that geographical
focus seems to be no main motive for spin-offs (Bodnar et al., 2000). Accordingly, authors like
Brewer (1981) and Fatemi (1984) claim no significant value anomaly between multinationals and
purely domestic firms based on a large sample of American firms. On basis of this empirical evidence,
it is less likely that an improvement of geographical focus can be claimed as one of the possible
channels through which value might be created. However, Errunza and Senbet (1981) present a
significant relation between a firm’s excess market value and its international involvement. Veld and
Veld-Merkoulova (2004) did not find such value effect for European spin-offs occurring between
1987 and 2000. They enumerate in their paper several theoretical reasons to expect either a negative or
positive relationship between a firm’s excess value and an increase in geographical focus.
The first reason to expect an increase in firm value is the lower cost for coordination and
monitoring. While the main objective for shareholders is value maximization, there is often a
misalignment since managers seek to act in their own self-interest. Obviously, this problem is
increasingly urgent when a firm’s structure becomes more complex (Kogut and Kulatilaka, 1994).
Purely domestic firms are arguably much less complex than multinationals. A spin-off of foreign
divisions will increase transparency and thus reduce coordination and monitoring costs. The second
argument is quite linked to the first one, it states that managers prefer a more geographical diversified
13
Harris and Raviv (1993) found evidence that investors interpret common signals quite differently.
19
Master Thesis Financial Management
Value creation from corporate restructuring
firm in order to lower their own risks even if it harms shareholder wealth. From this point of view, a
more geographical focused firm makes managers more concerned about divisional-specific risks and
at the end, it will no longer secure their positions within the firm as well (Aerts et al., 2008).
In contrast to the arguments above, geographical-improved spin-offs could also decrease
value. The first reason is that the remaining firm is substantially reduced in size after a spin-off. As a
result, it will be confronted with reduced economies of scale which is more disadvantageously when
main competitors operate internationally on large scale. The second reason is based on management
mistakes. It argues that geographical-improved spin-off can be interpreted as a signal to the market
that the management has made a poor decision to expand geographically in the past.
Given the pro and contra arguments above, a geographical improved spin-off can either result
in lower or higher abnormal returns. The direction of this effect will therefore be strongly depend on
the strengths of the arguments as assessed by the market. Due to the limited academic consensus about
improved geographical focus on shareholder wealth effects, this thesis will investigate the direction
and magnitude of that effect as well.
2.3.4 Impact of corporate governance
The fourth channel through which value might be created is based on the results of La Porta et al.
(1998). They show that shareholders in common law countries have the strongest legal protection
whereas civil law countries have the weakest. In common law countries, shareholders are most
frequently allowed to vote by mail, they require a relatively small stake in the firm to call an extra
ordinary shareholder meeting and they rarely block the sale of shares for shareholder meetings.
Furthermore, bondholder rights are important in restructuring-driven spin-offs due to changes in the
collateral of the firm will expropriate wealth from bondholders to shareholders. La Porta et al. (1998)
claim that common law countries offer the best protection for bondholders compared to civil law
countries. At first sight, investors in common law countries may benefit more from spin-off
transactions since they are better protected in several perspectives. Therefore, the place of transaction
may play an important role in the magnitude of vale creation through spin-offs, for instance between
Europe and the United States.
Unfortunately, recently available academic literature is largely limited to American firms
(Rossi and Volpin, 2004). These studies show positive announcement effects and long-run abnormal
returns in general14. Nevertheless, Veld and Veld-Merkoulova (2004) claim that there is no difference
in the announcement effect of European spin-offs between countries with different corporate
governance systems. They find also no evidence for long-run abnormal returns explained by
differences in shareholder rights between European countries15. Due to limited academic evidence, this
14
15
See for instance Daley, Mehrotra and Sivakumar (1997).
They find no impact of shareholder rights on one-year excess returns.
20
Master Thesis Financial Management
Value creation from corporate restructuring
thesis will analyze whether shareholder protection is associated with significant abnormal returns in
the short and long-run.
2.3.5 Tax implications
Several types of American spin-offs are taxable. The tax implications may differentiate for the parent
firm, the off-spring firm and for the shareholders of the parent firm (Maydew et al, 1999). There are
three criteria playing a major role in the assessment whether American spin-offs are taxable and to
what extent. The first criterion is whether the parent and the off-spring firm remain a fiscal group after
the transaction. Secondly, whether hidden reserves will be revealed during the spin-off transaction.
Thirdly, whether the spin-off will generate capital gains for the shareholders. Due to the complexity of
these three criteria in practice, tax implications on American spin-offs are quite difficult to estimate for
shareholders around the announcement date. Empirical studies by e.g. Vroom and Frederikslust (1999)
show that shareholders esteem non-taxable spin-offs with higher positive abnormal returns than
taxable spin-offs. In European countries, spin-offs are usually not involved with tax implications since
taxation on capital gains are deferred (Veld and Veld-Merkoulova, 2004). This implies that many tax
authorities in Europe consider a spin-off as a restructuring of investments that the investor already
own. According to Gibbs (1999), some countries in Europe like France, Germany and The
Netherlands enforce a different fiscal policy16. Before 1998, the Dutch tax authority classified a spinoff as a distribution of capital and hence it was taxed. As from June 1998, tax rules have been changed
and so spin-offs are no longer taxable in The Netherlands. In Germany, a spin-off can be considered as
tax neutral on condition that less than 20% of the shareholders disposes their shares within five years
(Zaman, 1998). For that reason, shareholders will face uncertainty around the announcement date
whether German spin-offs are taxed. Only in the period after the spin-off should it turns out whether
there are still taxes that have to be collected. In France, the story is nearly the same, the tax authorities
will only make the taxation decision after the spin-off is undertaken. For these complexity reasons,
taxes are not considered in the analyses of this thesis.
2.3.6 Wealth transfers from bondholders to shareholders
In academic literature, a wealth transfer from bondholders to shareholders can be characterized as one
of the several channels used to explain shareholder wealth gains after a spin-off announcement17. One
point of view is that bondholders will be better off since spin-offs are usually involved with an
increase in firm value. This should imply significant positive abnormal bond returns around the date of
the spin-off announcement. However, Maxwell and Rao (2003) claim evidence for a wealth transfer
from bondholders to shareholders18. First, they find a positive relation between the relative size of the
16
This statement was claimed by the author based on the situation before 1998.
See for instance Veld and Veld-Merkoulova (2005) or Maxwell and Rao (2003)
18
Maxwell and Rao (2003) used monthly bond return data from LBBD database.
17
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Master Thesis Financial Management
Value creation from corporate restructuring
spin-off and shareholder abnormal returns while they notice a negative relation for bondholders
simultaneously. According to the authors, the loss of collateral is therefore one of the reasons to
explain the wealth expropriation effect from bondholders to shareholders. This conclusion is strongly
in line with Galai and Masulis (1975) suggesting that bondholders of the parent firm will face a
demolition in collateralization since a fraction of assets has been assigned to the off-spring firm.
Accordingly, if the firm will fall into bankruptcy in the near future then it is more likely that
bondholders may suffer a lower liquidation value. Secondly, Maxwell and Rao (2003) find a lower
correlation in cash flows for cross-industry business units rather than for single-industry units,
indicating that cross-industry spin-offs yield potentially higher wealth transfers from bondholders to
shareholders than in the case of single-industry spin-offs. This coinsurance effect occurs when cash
flows of the parent and off-spring firm are not perfectly correlated and might be reduced after a spinoff. In other words, debt should become more risky and thus bond ratings may decrease substantially
after a spin-off (John, 1993). The measurement of a possible wealth transfer from bondholders to
shareholders requires the use of bond data. Unfortunately, due to many European firms use nontradable bank debt instead of bonds, an investigation to this potential value channel is quite tough
(Veld and Veld-Merkoulova, 2005). Moreover, bondholders are usually protected by complex
covenants from the loss of collateral. Because of these two reasons, the expropriation effect from
bondholders to shareholders will not be considered in the continuation of this thesis.
2.3.7 The size of spin-offs
Several academic studies (e.g. Schipper and Smith, 1983) find significant announcement effects when
the relative size of the off-spring firm is relatively large. This effect can be explained since a spin-off
is a divestiture method by which firm value is assumed to increase by getting rid of the firm’s value
destroying activities. Intuitively, by getting rid on a larger part of these value destroying activities, the
value of the remaining assets should increase. Important to note, it is not the ‘size’ of the spin-off per
definition which explains positive shareholder wealth effects.
Strikingly, studies on the long-run performance of spin-offs seem to reverse the statement
(Mulherin and Boone, 2000). Anslinger, et al. (1999) show that relatively small U.S. spin-offs
outperform large spin-offs on the stock market in the long run. Study by Veld and Veld-Merkoulova
(2004) does not find such kind of relation between firm size and long-run excess returns for European
Spin-offs19. Therefore, this thesis includes the relative size component as a possible determinant in
explaining shareholder wealth effects in the short and long-run analyses.
19
Veld and Veld-Merkoulova find a (not significant) positive relation between firm size and two-year excess
returns for European spin-offs.
22
Master Thesis Financial Management
Value creation from corporate restructuring
2.3.8 The timing effect of spin-offs
Jung et al. (1996) suggest that timing is an important determinant in the decision whether a firm
should be restructured and what kind of restructuring method is most feasible. The timing effect refers
to the practice of issuing shares at high prices. If the stock market is at an overvalued peak, existing
shareholders may benefit from market timing at the expense of entering shareholders. The feasibility
of the timing effect theory of spin-offs requires two practical premises: (1) managers must have the
skills to time and (2) managers must have incentives to time. Holden (2005) find evidence that
managers have an incentive to time the market when they care about existing shareholders or when
they hold a stake in the firm by their own. By setting up suitable incentive schemes, managers can be
more stimulated to keep the importance of timing into mind. Furthermore, the manager’s capability for
timing depends on available information. For instance, a valuation of the firm based on multiples
requires information about competitors which is not always available or reliable in many countries.
One can claim that the timing of spin-offs at transaction date is irrelevant since the spin-off
transaction does not generate any cash. Nevertheless, Tehranian et al. (1987) explain that timing is
really important, as it ensures a good start for the off-spring firm’s stock after being listed and
especially when the firm is willing to issue equity in the near future. A number of academic studies
based on American spin-offs (e.g. Desai and Jain, 1999) find no significant association of timing on
shareholder wealth effects at announcement. Studies on European spin-offs as by Veld and VeldMerkoulova (2004) and Kirchmaier (2003) do not include the timing effect as potential value channel
in their analyses. Therefore, this thesis will include the timing effect of European spin-offs.
2.3.9 The presence of a takeover threat prior to the spin-off announcement
Another possible value channel that might explain shareholder wealth effects is the increase of
corporate control after a spin-off is undertaken. As by definition, shares of a public firm are tradable
and even in large blocks. Thus in essentially, control over firms can be traded as well20. This provokes
some pressure on managers to perform, otherwise their firm can be taken over and they should be
dismissed in all likelihood (Jensen and Ruback, 1983). Chemmanur and Yan (2004) have developed a
theoretical analysis consistent with recent empirical evidence, showing that (1) spin-offs may increase
the probability of a hostile takeover. They show also that (2) spin-offs may enhance firm performance
by stimulating the firm’s management discipline in the presence of such value increasing takeover.
Cusatis et al. (1993) show evidence of higher abnormal stock returns for American spin-offs facing
any indication for takeover threats compared to spin-offs without such kind of indication. Studies on
European spin-offs seem to present the same conclusions (Boreiko and Murgia, 2010).
20
With exception of several takeover protection mechanisms such as administrative office constructions (in
Dutch: ‘Administratie-kantoor’), etcetera.
23
Master Thesis Financial Management
Value creation from corporate restructuring
Bidding firms are usually only interested in some activities of the target firm for a variety of
21
reasons . Therefore, the likelihood for a takeover will increase substantially when that target firm
performs a spin-off of the bidding firm’s desirable activities. Recent academic literature shows that
hostile takeovers are usually involved with high premiums resulting into positive shareholder wealth
effects (Goergen and Renneboog, 2003). Given the findings that spin-offs may increase the probability
of hostile takeovers at high premiums, shareholders will probably be better off in the near future. This
is one point of view to expect why spin-offs incurred with a takeover threat show significantly higher
positive abnormal returns than spin-offs without any indication of a takeover threat.
Another point of view is the positive association of corporate control on managerial discipline.
The firm’s traded securities should provide a much cleaner signal of managerial productivity after a
spin-off is undertaken rather than were business units are part of a combined firm (Aron, 1991). As a
benefit, firms will be better enable to provide managerial incentive contracts based on a cleaner stock
price. Furthermore, the capital market may act as a stronger monitor for agency problems when a spinoff is undertaken to improve visibility of managerial productivity (Manne, 1965). If the price of the
firm’s shares moves downwardly as a consequence of poor management, the firm may be taken over
by another firm or group of shareholders. In a hostile takeover, top managers of the acquired firm are
usually displaced. Thus the fear of a hostile takeover provides managers an incentive to improve stock
prices and so putting pressure on managers to take action in shareholders best interests. This thesis
incorporates the increase of corporate control as potential value channel in section 6 and 7.
21
For instance, these reasons can be financially or strategically from nature.
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Master Thesis Financial Management
Value creation from corporate restructuring
3. Literature review
Empirical research on spin-offs has revealed a great deal about shareholder wealth effects (Comment
and Jarrell, 1995). Most of these studies are related to the United States while relatively little research
is done with respect to European spin-offs specifically. This can be explained by the longer history
and higher popularity of spin-offs in the United States compared to Europe (Kirchmaier, 2003). This
section highlights the results from empirical studies on the value effects of spin-offs. First, empirical
findings about shareholder abnormal returns around the announcement period will be presented.
Secondly, studies on the long-run stock performance of spin-offs will be described. Finally, evidence
on changes in operating performance will be documented.
3.1 Shareholder wealth effects around the announcement period
Recent academic literature shows that spin-offs are generally associated with positive abnormal
returns around the announcement period. Table 1 (below) summarizes several well known studies on
shareholder wealth effects around a spin-off announcement. These studies claim that shareholder
wealth may increase substantially after a spin-off announcement with a magnitude between +2% to
+4%. Some of these studies from table 1 will be described in more detail now.
Table 1
Existing studies on wealth effects associated with spin-off announcements.
Event
Author(s)
Year
Country
Period
N
Window
CAR
Significance
Schipper and Smith
1983
US
1963-1981
93
[-1, 0]
2.84%
***
Miles and Rosenfeld
1983
US
1963-1980
55
[0, 1]
3.34%
***
Slovin, Sushka and Ferraro
1995
US
1980-1991
37
[0, 1]
1.32%
**
Desai and Jain
1999
US
1975-1991
144
[-1, 1]
3.84%
***
Krishnaswami and Subramaniam
1999
US
1978-1993
118
[-1, 1]
3.28%
***
Maxwell and Rao
2003
US
1976-1997
79
[0, 1]
3.59%
***
Murray
2000
UK
1992-1998
25
[-1, 1]
-0.19%
N.S.
Schauten, Steenbeek and Wycisk
2001
UK
1989-1996
23
[-1, 1]
2.13%
*
Kirchmaier
2003
EU
1989-1999
48
[-1, 1]
5.40%
***
Veld and Veld-Merkoulova
2004
EU
1987-2000
156
[-1 ,1]
2.62%
***
Koh, Koh and Koh
2005
SGP
1985-1991
63
[0, 0]
2.43%
***
Sin and Ariff
2006
MY
1986-2002
85
[-1, 0]
1.80%
*
This table presents a summary of several existing studies on abnormal returns from spin-offs around the
announcement period. Significant figures at the 1%, 5% and 10%-level are classified by ***, **, * respectively.
N.S. stands for Not Significant. SGP and MY are an abbreviation for Singapore and Malaysia respectively.
Schipper and Smith (1983) investigated the effect of 93 voluntary spin-offs on shareholder wealth
between 1963 and 1981. They used a CAPM based market model to find a significant positive
announcement effect of +2.84% for the event window from day -1 to the day of announcement.
Furthermore, they claim that shareholder gains may arise from tax and improved managerial efficiency
resulting from the spin-off. However, they did not find evidence for the wealth transfer argument from
bondholders to shareholders. They also observed that most off-spring firms (72 out of 93) were active
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Master Thesis Financial Management
Value creation from corporate restructuring
in dissimilar industries than the parent firms. Cross-sectional tests show an average abnormal return of
+5.1% for focus increasing spin-offs compared to +2.3% for the non-focus increasing spin-offs.
Academic papers from Desai and Jain (1999) and Krishnaswami and Subramiam (1999) show
positive abnormal returns around 3% in the event window from day -1 to the day of announcement.
This is not surprising since in both studies a very identical sample period was chosen and only
American spin-offs were considered. However, the main focus of both studies is different. Desai and
Jain (1999) investigated whether stock market performance is positively associated with an
improvement of corporate focus. They found evidence that the three-day announcement period
abnormal returns are significantly higher for focus-increasing spin-offs (+4.45%) than for non-focusincreasing spin-offs (+2.17%). On the other hand, Krishnaswami and Subramiam (1999) researched
whether the gains around the spin-off announcement period are positively related to the degree of
information asymmetry. They show that the top quartile information-asymmetry-reducing spin-off
transactions (+4.11%) results in higher abnormal returns compared to the bottom quartile (+2.28%).
Despite the main conclusion that spin-offs are associated with significant positive abnormal
returns ranging from 2% to 4%, the study by Murray (2000) presents a non-significant negative
abnormal return of -0.19%. Murray (2000) investigated a small sample of 25 spin-offs in the United
Kingdom for the event window of day -1 to day 1. However, one year later, Schauten, Steenbeek and
Wycisk (2001) came up with new results for the same country and event window showing an
abnormal return of 2.13% at the 10% significance level. This result is more in line with previous
studies for American spin-offs.
The first well known authors who examined European spin-offs are Kirchmaier (2003) and
Veld and Veld-Merkoulova (2004). Kirchmaier (2003) claims relatively high positive significant
announcement effects for European spin-offs (5.40%) compared to American spin-offs. Unfortunately,
Kirchmaier (2003) did not investigate the impact of corporate governance on shareholder wealth
effects as possible value channel. Furthermore, the author argues that size has a decisive but inverse
impact on value creation. Evidence for an increase of corporate control and managerial discipline
could however not be found. Veld and Veld-Merkoulova (2004) used a larger sample of 156 European
spin-offs from 15 different countries that were announced between 1987 and 2000. They show a
cumulative average abnormal return of 2.62% over a three day event window. Their cross sectional
test shows that European focus-increasing spin-offs (3.57%) outperform non-focus-increasing spinoffs (0.76%). Issues like corporate governance, geographical focus and information asymmetry seems
to be no value channel through which value might be created22.
Finally, studies on the short-run wealth implications affected by spin-offs in countries as
Singapore and Malaysia do not show completely different results. One possible explanation is that
22
The difference between the sub-samples for these individual issues are not statistically significant different
from zero.
26
Master Thesis Financial Management
Value creation from corporate restructuring
corporate governance plays a very little or no role in the value creation process of spin-offs as
perceived by shareholders. Koh, Koh and Koh (2004) assert evidence that positive abnormal returns
are associated to the relative size of the off-spring firm and the computed accounting gains as well.
According to the authors, these findings imply that the Singapore’s capital market anticipates strongly
on accounting gains.
3.2 Long-run abnormal returns
The number of studies based on the long-run stock performance after spin-offs has been studied more
limited than on shareholder wealth effects around the announcement period (Jongbloed, 2004). Two
arguments can be adduced for this. First, studies on long-run stock performance face some
methodological difficulties since several issues which are not related to the spin-off may influence the
results. Thus, the further development of the share price after the spin-off is undertaken can be caused
by many other factors. Secondly, it can be assumed that share prices fully reflect the available
information in an efficient capital market. Therefore, significant long-run abnormal returns do not
exist in that case. However, table 2 (below) presents that American studies have reported significant
positive long-run abnormal returns for the pro-forma combined firms, parent firms and off-spring
firms. Studies on European spin-offs show distinct magnitudes and weak significance compared to
American spin-offs.
Table 2
Long-run stock market performance.
Author(s)
Country
Desai and Jain
US
(1999)
Period
1975-1991
N
Subject
AR [T -to- T+12]
AR [T -to- T+24]
155 Combined
+7.7%
+12.7%
155
Parent
+6.5%
+10.6%
155 Off-spring
+15.7%***
+36.2%***
Cusatis, Miles and
US
1965-1990 141 Combined
+4.7**
+26.2%*
Woolridge (1993)
141
Parent
+12.5%**
+26.7%**
141 Off-spring
+4.5%
+25.0%**
Kirchmaier (2003)
EU
1989-1999 29
Combined
+2.6%
-0.3%
34
Parent
-0.3%
-4.6%
29
Off-spring
+4.6%
-0.6%
Veld and Veld-Merkoulova
EU
1987-2000 61
Combined
-0.89%
+8.49%*
(2004)
105
Parent
+4.43%
+14.28%***
70
Off-spring
-15.75%
-22.04%*
This table presents a summary of several existing studies on long-run abnormal returns from spin-offs. Significant
figures at the 1%, 5% and 10%-level are classified by ***, **, * respectively. All long-run studies are based on buy
and hold abnormal returns (BHAR). ‘T’ stands for transaction date, where ‘12’ and ‘24’ represent the number of
months after the transaction date.
Desai and Jain (1999) claim substantial long-run wealth effects for shareholders of the off-spring firm
with a magnitude of +15.7% and +36.2%, respectively one and two-years after the spin-off is
performed. The authors do not find long-run wealth effects for the pro-forma combined firms and
parent firms due to the lack of statistical significance. Moreover, Desai and Jain (1999) report that
27
Master Thesis Financial Management
Value creation from corporate restructuring
focus-increasing parent firms (+17.54%) outperform non-focus-increasing parent firms (-6.95%) over
two years after the spin-off is undertaken.
Research by Cusatis, Miles and Woolridge (1993) on the long-run performance of spin-offs
was motivated by a lack of evidence and persistent claims in the business press that spin-offs may lead
to superior returns for investors. They find indeed evidence that shareholders of pro-forma combined
firms (+26.2%), parent firms (+26.7%) and off-spring firms (+25.0%) will benefit over a two-year
period after the spin-off is undertaken. The authors argue that both parent firms and off-spring firms
may experience an unusually high probability to be taken-over23. That is way spin-offs can be
considered as a low cost transaction of transferring control of the firm’s assets to bidders who may
create greater value.
Kirchmaier (2003) reports only insignificant long-run abnormal returns for European spin-offs
over a time period of one and two years after the restructuring. This is very surprising since many
American studies came up with statistically significant figures. Kirchmaier (2003) explains this
discrepancy by the difference in capital market efficiency between the countries. Furthermore, the
long-run analyses demonstrated that the size of the spin-off plays an important role in shareholder
wealth effects. Small spin-offs (+6.4%) were far more successful than large spin-offs (+1.6%) based
on a sample of 29 spin-offs24.
Veld and Veld-Merkoulova (2004) investigated long-run stock market performance of
European spin-offs in the (approximately) same period as Kirchmaier (2003) but based on a larger
sample size. Unlike Kirchmaier (2003), they find statistically significant long-run abnormal returns.
Pro-forma combined firms (+8.49%) and parent firms (+14.28%) will outperform the stock market
substantially over a two-year period after the spin-off is undertaken while off-spring firms (-22.04%)
underperform. The regression analysis on the two-year excess returns of parent firms shows that
geographical focus and shareholder rights are the only significant coefficients. As mentioned before,
these explanatory factors do not play a role in the announcement period abnormal returns25. This can
possibly be explained by the limited ability of investors to estimate the impact of corporate
governance and an increase of geographical focus on (equity) value26.
3.3 Changes in operating performance
Empirical research on the change in operating performance after a spin-off is undertaken has obtained
very little academic attention. One important reason is that a change in operating performance should
be incorporated directly in the stock performance of the firm. Therefore, the stock market performance
23
This argument is in line with the described possible value channel as in section 2.3.9 (increase of corporate
control and managerial discipline).
24
Again, the results are statistically insignificant.
25
See section 3.1 last paragraph.
26
As described in section 2.3.3, an increase in geographical focus can either result in a positive or negative
wealth effect.
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Master Thesis Financial Management
Value creation from corporate restructuring
seems to be an easier measure of firm performance in the long-run. Again, this statement assumes a
perfect capital market, which is a questionable assumption in practice (Li and Li, 1996). Moreover,
operating performance measured by return on assets (ROA) is often linked to compensation packages
and therefore important for managers and for the remuneration board as well (Minnick et al., 2010).
There are few studies investigating the change in operating performance of firms involved in
American spin-offs while to the best knowledge of the authors, there is no study available for
European spin-offs (Chemmanur et al., 2007). Recent academic literature provides mixed evidence on
whether operating performance will be improved after an American spin-off is completed.
Woo et al. (1992) measured the impact of spin-offs on changes in operating performance in the
long-run. Their sample is based on 51 American spin-off events between 1972 and 1986. The results
present that American spin-offs do not improve operating performance in the long-run. A three-year
post-spin-off period shows even lower return on assets, sales growth and market-to-book ratios than in
the period before the spin-off. Moreover, the authors claim that the increase in corporate focus has no
impact on the operating performance of parent firms within three years after the spin-off.
Cusatis, et al. (1993) researched a larger sample of 161 American spin-offs over a period of 1965
to 1990. They used adjusted operating income (before appreciation), growth rates of sales and changes
in total assets as proxies for operating performance. The authors document an increase of 7% in
operating income from one year prior to the transaction to two years subsequent to the transaction. The
results for total assets and sales are not statistically significant.
Daley et al. (1997) investigated changes in operating performance of parent firms after a spin-off
was undertaken by examining the return on assets in the time period of two years prior to the spin-off
until two years after the spin-off. The used sample consists of 85 spin-offs, whose 60 are focusincreasing spin-offs and 25 are non-focus-increasing spin-offs. The authors show improvements in
operating performance for focus-increasing spin-offs (+2.3% ∆ROA) but smaller changes for nonfocus-increasing spin-offs (+0.7% ∆ROA). This result is consistent with the statement that spin-offs
might create value by removing negative operating synergies and allowing managers of the parent firm
to focus more on their core operations.
Desai and Jain (1999) present results strongly in line with Daley et al. (1997). They evaluate the
change in operating performance as the change in operating cash flows divided by the change in total
assets of the parent firm. The parent firms involved in focus-increasing spin-offs face changes in
operating performance with a magnitude of +2.9% from one year prior to three years after the spin-off.
However, the operating performance of non-focus-increasing spin-offs shows no improvements after
the spin-off is undertaken. Finally, they conclude that parent firms outperform off-spring firms in
operating performance terms as well as that focus improves post-spin-off performance.
Empirical evidence on operating performance in the long-run does not exist for European spinoffs. Therefore, the aim of this thesis is to obtain more academic evidence on this topic.
29
Master Thesis Financial Management
Value creation from corporate restructuring
4. Hypotheses
This section employs several hypotheses based on theoretical reasoning (section 2). These hypotheses
are developed in such a way that it will serve the main question of this thesis whether European
corporate spin-offs create shareholder wealth and through which channels it might be created. The aim
of the first hypothesis is to find an answer on whether European spin-offs contribute to positive
shareholder wealth effects in the short-run. The second and third hypotheses focus on the long-run
wealth effects after European spin-offs are undertaken. The rest of the formulated hypotheses are
based on several channels through which shareholder wealth effects might be explained.
H1: European spin-offs will result in positive abnormal returns to the shareholders of the
parent firm in the short-run.
The first hypothesis is based on section 2.3. This section describes three main academic foundations
for a positive value creation in corporate spin-offs by a reduction of (1) transaction costs, (2)
misalignment of interests between insiders and outsiders and (3) information asymmetry. Furthermore,
there is strongly academic consensus that American spin-offs will result in positive wealth effects for
existing shareholders around the announcement period (see table 1).
H2: Long-run abnormal returns following European spin-offs are not significantly
different from zero.
The second hypothesis is based on the efficient market hypothesis. This implies that share prices
should fully reflect the available information. As described in section 3.2, the European capital market
seems to be more efficient than the American capital market (Kirchmaier, 2003). As a result, available
information is rather entirely incorporated in the value effect of European spin-offs at the
announcement date. Therefore, abnormal returns are less likely to occur in the long-run in the case of
European spin-offs.
H3: The long-run operating performance of parent firms will be improved following
European spin- offs.
The third hypothesis is based on the theorem that some (unrelated) divisions hinder the operating
efficiency of the entire firm. After the spin-off, these inefficient divisions are spun-off and the parent
firm should improve its operating performance with the remaining divisions. Moreover, several
American studies claim substantial positive changes in operating performance following American
spin-offs. Unfortunately, to the best knowledge, there are no recent academic studies which
investigated changes in operating performance following European spin-offs. That is way it makes this
hypothesis interesting to test in this thesis as well.
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Master Thesis Financial Management
Value creation from corporate restructuring
H4: Focus-increasing spin-offs will result in higher abnormal returns than non- focusincreasing spin-offs.
The fourth hypothesis is based on section 2.3.1. Corporate diversification theories describe benefits as
well as drawbacks of more diversified firms. Benefits can be found in terms of market power, internal
capital markets and the resource based view. The strengths of these benefits are defended by the
argument that even in countries that have taken intensive de-conglomeration operations, firms are still
diversified. However, a majority of academic papers report a significant conglomerate discount. This
reflects the perception that spin-offs are very suitable to exploit the conglomerate discount.
H5: High information asymmetry-reducing spin-offs will result in higher abnormal
returns than low information asymmetry-reducing spin-offs.
The fifth hypothesis is based on section 2.3.2. A higher level of information asymmetry can lead to
undervaluation of the firm’s securities since shareholders may face valuation problems due to a lack of
reliable information. A spin-off transaction can facilitate a mitigation of information asymmetry by
floating the shares of the spun-off divisions to the market separately. Krishnaswami and Subramaniam
(1999) present clear evidence that American spin-offs enhance shareholder wealth because it mitigates
information asymmetry about the firm. In essentially, there is no reason to assume any difference in
information-asymmetry perception between American spin-offs and European spin-offs.
H6: Geographical-increasing spin-offs will not result in higher abnormal returns than nongeographical-increasing spin-offs.
The sixth hypothesis is based on section 2.3.3. As explained before, a geographical-increasing spin-off
may contribute to both positive and negative shareholder wealth effects. For instance, an increase of
geographical focus will reduce the firm’s operational complexity and hence the costs for coordination
and monitoring. On the other hand, a geographical-increasing firm can be confronted with reduced
economies of scale which is more disadvantageously when main competitors operate internationally
on large scale. Given the both (potential) positive and negative wealth effects, it can be expected that
an increase in geographical focus is irrelevant on large scale.
H7: Spin-offs executed in common law countries will result in higher abnormal returns than
spin-offs executed in civil law countries.
The seventh hypothesis is based on section 2.3.4. As described, investors in common law countries are
better off than investors in civil law countries since the latter is weaker protected in a spin-off
transaction. Therefore, from a theoretical point of view, the place of transaction should play an
important role in explaining shareholder wealth effects.
31
Master Thesis Financial Management
Value creation from corporate restructuring
H8: Shareholder wealth effects are positively associated with the relative size of assets that is
spun-off.
The eighth hypothesis is based on section 2.3.7. As described in the theoretical framework section,
clarifying ‘size’ as determinant in shareholder wealth effects is quite difficult. For instance, it is not
correct to state that a smaller or bigger spin-off is more beneficial per definition. A better theoretical
explanation should be that a possible wealth effect can be explained by getting rid on a larger part of
the value destroying activities, so that the value of the remaining assets should increase. American
studies find significant positive wealth effects when the portion of assets that is spun-off is relatively
lager. Even studies on wealth effects of European spin-offs show a positive relation. Therefore, the
hypothesis in this thesis assumes a positive relation as well.
H9: Spin-offs performed in a hot market will not result in higher abnormal returns than spinoffs performed in a cold market.
The ninth hypothesis is based on the timing effect of spin-offs. As described in section 2.3.8, the
timing of a spin-off transaction should be irrelevant since the transaction does not raise any cash. A
number of academic studies based on American spin-offs (e.g. Desai and Jain, 1999) find no
significant association of timing on shareholder wealth effects at announcement. Veld and VeldMerkoulova (2004) and Kirchmaier (2003) did not include the timing effect as potential value channel
in European spin-offs. This makes the timing of European spin-offs an interesting issue to test.
H10: Spin-offs facing a takeover threat prior to the announcement will result in higher
abnormal returns than spin-offs without such kind of indication.
The final hypothesis is based on section 2.3.9. As explained before, a spin-off transaction may
increase the probability of a hostile takeover (Chemmanur and Yan, 2004). This has two implications:
(1) it will stimulate the firm’s management discipline and (2) shareholder will reckon with high
takeover premiums in the case that the firm is actually taken over. Therefore, it can be assumed that
the presence of a takeover threat prior to a spin-off announcement is positively associated with
shareholder wealth effects.
Table 3 gives a summary of the testable items and its accompanying hypotheses as described in this
section. The second column of table 3 provides the expected impact. This expected sign describes
whether the relation between a spin-off and the testable item is expected to be positive (+) or unrelated
(≠). The empirical results in section 6 should turn out whether the expected relation can be claimed as
real relation on the testable items. The next section will describe the methodology used to test these
several hypotheses.
32
Master Thesis Financial Management
Value creation from corporate restructuring
Table 3
Summary of the hypotheses as treated in this thesis.
Testable item
Expected relation
Short-run wealth effects
+
Accompanying hypotheses
European spin-offs will result in positive abnormal
returns to the shareholders of the parent firm in the
short-run.
Long-run wealth effects
Long-run abnormal returns following European spin-offs
≠
will not be significantly different from zero.
Change in operating performance
+
The long-run operating performance of parent firms will
be improved following European spin-offs.
Improvement of corporate focus
+
Focus-increasing spin-offs will result in higher abnormal
returns than non- focus-increasing spin-offs.
Reduction of information asymmetry
+
High information asymmetry-reducing spin-offs will
result in higher abnormal returns than low information
asymmetry-reducing spin-offs.
Improvement of geographical focus
Geographical-increasing spin-offs will not result in
≠
higher abnormal returns than non-geographicalincreasing spin-offs.
Impact of corporate governance
Spin-offs executed in common law countries will result
+
in higher abnormal returns than spin-offs executed in
civil law countries.
The size of spin-offs
+
Shareholder wealth effects are positively associated with
the relative size of assets that is spun-off.
The timing effect
Spin-offs performed in a hot market will not result in
≠
higher abnormal returns than spin-offs performed in a
cold market.
The presence of a takeover threat
+
Spin-offs facing a takeover threat prior to the
announcement will result in higher abnormal returns than
spin-offs without such kind of indication.
This table presents a summary of the hypotheses as treated in this thesis. The expected relation describes whether a
spin-off has a positive association (+) or no association (≠) with the testable items.
33
Master Thesis Financial Management
Value creation from corporate restructuring
5. Data description and methodology
This section describes the data retrieval process and the methodology to determine shareholder wealth
effects in the short-run as well as in the long-run. Section 5.1 specifies the sources used to identify
spin-off announcements, to collect security prices and to find firm specific information. Moreover, a
description of the used sample will be presented in that section. Section 5.2 enumerates the several
variables that are used in the analyses to test the accompanying hypotheses. Section 5.3 describes in
detail the methodologies employed to calculate the announcement effects, long-run abnormal returns
and the change in operating performance. Finally, an ordinary least squares (OLS) regression will be
set up to assess the value channels involved in spin-off transactions.
5.1 Data description
This thesis focuses on a sample of European spin-offs that covers a period of ten years from January
1998 to December 2007. European spin-offs are characterized as a spin-off in which a European
located parent firm spin-offs a subsidiary that is floated to an European stock exchange as well. Thus,
the subsidiary can be located in a different country than the parent firm on condition that it is a
European country. European countries in this thesis include: The United Kingdom, The Netherlands,
Sweden, France, Germany, Belgium, Italy, Finland, Spain, Switzerland, Norway, Ireland, Denmark
and Greece. Formerly socialist Eastern European countries are excluded from this study due to their
relatively poor developed capital markets.
Spin-off events were retrieved from the Securities Data Company (SDC) Mergers and
Acquisitions Platinum Database. This database contains specific information with respect to the
announced spin-offs such as the announcement date, deal value and accompanying industries. The
ZEPHYR database is used to verify the data from the SDC database and to collect missing
announcement dates27. Primary SIC codes for the parent firms and off-spring firms were obtained by
using the Alacra database. This database contains industry specific information for more then 45.000
public firms. Information about analyst forecast accuracy was derived from the Institutional Brokers
Estimate System (IBES). The IBES-database provides data with respect to forecasted earnings per
share (EPS), actual EPS, earnings volatility and the standard deviation of forecasts needed in the
analyses of this thesis to conclude the impact of information asymmetry as potential value channel.
Finally, Amadeus and LexisNexis were used to obtain any indication for a firm’s takeover threat28.
The initial sample consists of 227 European spin-off events. However, several spin-offs are
eliminated from the sample for three reasons. First, SDC database and ZEPHYR record parent firms
that announced a spin-off of two or more subsidiaries on the same date. A simultaneously announced
27
The ZEPHYR database is property of Bureau van Dijk Electronic Publishing and contains information about
mergers and acquisitions, initial public offerings and private equity deals.
28
LexisNexis is a (news) database containing over 4 billion documents from over 35.000 International and
National sources. Amadeus is a comprehensive database containing information on ownership and equity stakes.
34
Master Thesis Financial Management
Value creation from corporate restructuring
spin-off makes it hard to distinguish the impact of each individually spin-off on shareholder wealth
effects. To use clear data, 26 spin-off events were eliminated from the sample for that reason.
Secondly, for some firms there was a lack of stock price information in Thomson Financial
DataStream for the required period around the spin-off announcement. 30 Spin-off events were
eliminated for that reason as well. Thirdly, 40 spin-off events were excluded since there was not
enough information available about the parent firm. This procedure yields a final sample size of 131
European spin-off events in the period of January 1998 to December 2007. Out of these 131 spin-off
events, 91 were completed29. Table 4 presents an overview of the annual and geographical distribution
of the spin-off events. Clearly, the UK is with 29% heavily represented in the final sample (38 out of
131 events), as are Sweden (18%) and Germany (16%). The remaining countries take up 37% of the
final sample size (49 out of 131). The last column of table 4 shows the distribution of the spin-off
events by announcement year. Strikingly, the number of spin-offs is fairly distributed over the sample
period with exceptions for 2000 and 2002. In 2000, relatively a lot of spin-off events were occurred
while in 2002 this amount was rather small. A possible explanation can be found in the timing-effect
of spin-off events. The climax on March 2000 was characterized as the booming times of the dot-com
bubble where 2002 was known as a bear market after the collapse of that bubble.
Table 4
Overview of spin-off events by announcement year and country.
Year
UK NL SW FR GE BE IT FI SP CH NO IR DE GR
1998
12
2
8
1
3
1
1999
6
4
4
2
2
2
1
2
2
2000
15
2
1
7
1
2
5
1
3
2
2
1
2001
7
5
1
1
1
1
1
2
2002
3
1
1
1
2003
3
2
1
2
1
3
1
1
1
2004
4
3
2
2
2
2
1
2005
6
1
4
1
4
1
3
2
1
1
1
2
2006
9
1
2
1
5
3
3
1
2007
9
2
4
1
2
1
6
= Total number of observations
74
13
33
6
28
7
17 10
2
11
15
5
2
4
-/- Multiple announcement
8
5
2
6
3
2
-/- no stock price data available
3
5
3
1
4
1
4
4
3
2
-/- parent not known
25
2
2
1
1
2
3
2
1
1
Total sample
38
6
23
4
21
6
5
7
2
4
8
4
2
1
Completed
33
3
20
3
5
4
3
5
1
3
7
3
0
1
This table overviews the distribution of European spin-offs that are announced in the period from January 1998
to 2008. The observations are identified from the SDC Platinum Database and verified by using the ZEPHYR
database. Parent firms that announced a spin-off of two or more subsidiaries simultaneously were eliminated
from the sample. Lack of information on the identity of the parent firm and/or the stock price was a reason to
eliminate as well. Countries are abbreviated as follows: UK for United Kingdom, NL for The Netherlands, SW
for Sweden, FR for France, GE for Germany, BE for Belgium, IT for Italy, FI for Finland, SP for Spain, CH for
Switzerland, NO for Norway, IR for Ireland, DE for Denmark and GR for Greece.
29
The terminology ‘completed spin-off event’ implies that the spin-off transaction was really occurred.
35
Total
27
25
42
19
6
15
16
27
25
25
227
26
30
40
131
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Master Thesis Financial Management
Value creation from corporate restructuring
Table 5
Descriptive statistics about the market values of the parent firms and off-spring firms.
Descriptive statistics
Parent firms
Off-spring firms
Relative size of spin-offs
Mean
7,842
1,363
17.38%
Median
1,281
377
29.43%
Standard deviation
20,495
2,819
Minimum
14.41
6.38
Maximum
130,392
12,575
These figures are based on a sample of 91 completed spin-off events (see table 3). Market values are determined
as the market capitalizations one day before the transaction (for the parent) and on the moment of the first listing
(for the off-spring). Market values are in millions of Euros (€).
Table 5 presents descriptive statistics of the market values related to the parent firms and off-springfirms. The market value of the parent firms is determined as the market capitalization one day before
the spin-off event. The market value of the off-spring firms is based on the market capitalization at the
moment of the first stock listing. Table 5 shows two important insights. First, it shows a vast
difference in the mean and median statistics implicating that the final sample is characterized by large
variability in the size of the parent firms. The minimum and maximum statistics of the parent firms
demonstrate that not only big firms prefer spin-off transactions, but that small firms do as well.
Secondly, the relative size of the spin-off transaction based on mean and median statistics are 17.38%
and 29.43% respectively. Thus, (not surprising) the parent firms in the final sample are much greater
than the subsidiaries which were spun-off.
Table 6
Final sample distribution by industry groups.
2-digit SIC codes Industry groups
Observations
01-09
Agriculture, Forestry and Fishing
1
10-14
Mining
6
15-17
Construction
2
20-39
Manufacturing
27
40-49
Transportation, Communications, Electric and Gas Services
17
50-51
Wholesale Trade
5
52-59
Retail Trade
2
60-67
Finance, Insurance and Real Estate
39
70-89
Services
30
91-99
Public Administration
2
Total
131
This table presents the distribution of spin-off events by parent industry. Accordingly, the industries are
classified by the 2-digit SIC codes.
Table 6 presents the distribution of spin-off events by the parent industry. Ten industries are
categorized on basis of its 2-digit SIC code. Accordingly, the final sample is classified across these ten
industries. Four industries are clearly overrepresented with a relatively large number of observations.
These are Finance, Insurance and Real Estate (SIC 60-67) with 30%, Services (SIC 70-89) with 23%,
Manufacturing (SIC 20-39) with 21% and Transportation, Communications, Electric and Gas Services
(SIC 40-49) with 13%. The rest of the observations contribute for only 13%. The relatively high
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Master Thesis Financial Management
Value creation from corporate restructuring
representation of the Finance, Insurance and Real Estate (SIC 60-67) and Services (70-89) industries
are not surprising due to their in nature more complex services for the firm’s stakeholders compared to
other industries (Johnston et al., 2003).
5.2 Proxies
The variables used in this thesis to analyze the channels through which value might be created are
described in this section.
Corporate focus. The improvement of corporate focus is measured using the subsequent two
variables: (1) a two-digit Standard Industry Classification (SIC) code and (2) newspaper reports. The
two-digit SIC codes classifies a spin-off as focus increasing if the two-digit SIC code of the parent
firm is different from the two-digit SIC code of the off-spring firm. If this is the case then the
(dummy) variable is 1 and 0 if the two-digit SIC code of the parent firm is equal to that of the offspring firm. The second variable is based on newspaper reports collected by using LexisNexis. The
variable is classified as 1 if ‘corporate refocusing’ or related words were mentioned and 0 if it was not
the case.
Information asymmetry. A reduction in information asymmetry is measured using three
variables as described in the paper by Krishnaswami and Subramaniam (1999): (1) the absolute
earnings forecast error, (2) the standard deviation of earnings forecasts and (3) the normalized forecast
error. The data is derived from the Institutional Brokers Estimate System (IBES). The absolute
earnings forecast error is determined as the absolute difference between the forecasted earnings per
share (EPS) and the actual EPS in the last month of the year prior to the spin-off announcement. The
standard deviation of earnings forecasts is measured as the standard deviation of all earnings forecasts
made in the last month prior to the spin-off announcement. This figure should represent the
disagreement between analysts and is tagged as an indication of information asymmetry. Due to
forecast errors are more likely when earnings volatilities are higher, the normalized standard deviation
of forecasts should be a better variable to take this into account. The normalized standard deviation is
determined as the absolute earnings forecast error divided by the earnings volatility in the last month
preceding to the spin-off announcement.
Geographical focus. An increase in geographical focus is measured by using a dummy
variable. The variable takes value 1 if a foreign subsidiary is spun-off and 0 if a domestic subsidiary is
spun-off.
Corporate governance. The impact of shareholder protection is measured by using the La Porta
et al. (1998)-index. This index ranges from zero (very low shareholder protection) until five (very high
shareholder protection). On basis of this index, countries as treated in this thesis having the following
values: The United Kingdom (5), The Netherlands (2), Sweden (3), France (3), Germany (1), Belgium
(0), Italy (1), Finland (3), Spain (4), Switzerland (2), Norway (4), Ireland (4) and Greece (2). As it
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Master Thesis Financial Management
Value creation from corporate restructuring
turns out, the values for Anglo-Saxon countries are substantial higher than for Rhineland countries in
continental Europe.
The relative spin-off size. The relative size is measured as the ratio of total assets of the offspring firm and the total assets of the pre-spin-off firm. The total assets of the off-spring firms are
determined using the first published financial statements after the spin-off transactions. On the other
hand, the total assets of the pre-spin-off firms are based on the last published financial statements prior
to the spin-off transactions. These financial statements are collected by using the Amadeus database.
Timing-effect of spin-offs. This potential effect is measured by using two variables. The first
variable is the ‘hot market’ variable which is 1 if the spin-off took place in times of booming stock
market indices and is 0 otherwise. The second variable is the ‘cold market’ variable which is 1 if the
spin-off took place in times of low stock market indices and 0 otherwise. Using one variable for
measuring the timing-effect is not feasible in this case since there exists a normal market situation as
well. Years 1999, 2000 and 2006 are characterized as ‘hot markets’ and 2002, 2003, 2004 as ‘cold
markets’.
Table 7
Potential value channels and related variables.
Potential value channels
Improvement of corporate focus
Variables
1. Differences in the two-digit SIC codes.
2. Motives from newspaper reports.
Reduction of information asymmetry
1. The absolute earnings forecast error.
2. The standard deviation of earnings forecasts.
3. The normalized earnings forecast.
Improvement of geographical focus
Differences in geographical activity.
Impact of corporate governance
La Porta et al. (1998) shareholder right index
Tax implications
Will not be tested in this thesis.
Wealth transfers from bondholders to shareholders
Will not be tested in this thesis.
The size of spin-offs
Relative size of the off-spring firm compared to its
parent firm prior to the spin-off transaction.
The timing-effect of spin-offs
1. ‘Hot market’ in years 1999, 2000 and 2006.
2. ‘Cold market’ in years 2002, 2003 and 2004.
Increase of corporate control and managerial discipline Takeover threat in the last 12 months prior to spin-off.
This table presents and overview of the potential value channels and related variables as described in this
section.
Corporate control. This is measured by using a dummy variable. The dummy variable takes
value 1 if there is a takeover threat in the twelve months prior to the spin-off announcement and 0
otherwise. Takeover threats are identified by using news reports (LexisNexis) and by observing
increased equity stakes in the Amadeus database. For instance, there was a news report by the Sunday
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Master Thesis Financial Management
Value creation from corporate restructuring
Telegraph on 21 May 2007 stating that the UK operator of managed pubs, bars and restaurants,
Mitchells & Butlers PLC confirms to plan a spin-off. A clear motivation of the presence of a hostile
takeover threat was given. See the next quote:
“Pubs operator Mitchells & Butlers PLC is today expected to confirm plans to spin-off 4 bln stg of its property
portfolio in a major concession to key activist investor Robert Tchenguiz, as a possibility to offset a possible
hostile bid from the entrepreneur.”
Therefore, the dummy variable with value 1 is allocated to this firm in the sample.
5.3 Methodologies
This section contains the methodologies employed in this thesis. The first subsection describes the
event study methodology to calculate the announcement effects. The second subsection makes
concrete the methodology used to find out long-run abnormal returns. Finally, the methodology of
Daley et al (1997) to determine changes in operating performance will be described in the last
subsection.
5.3.1 The event study methodology
In this thesis, the methodology to determine the short-run abnormal returns (AR) is based on a basic
event study as presented by Brown and Warner (1985). In their paper, they discuss three approaches to
compute abnormal returns in an event study: (1) the market adjusted model, (2) the mean adjusted
model and (3) the ordinary least squares (OLS) market model. The latter seems to be the most
commonly used model in recent literature. For that reason, the OLS market model is used in this thesis
as well.
The first step in the OLS market model is to define the normal returns for each of the firms in
the sample. The normal returns are defined in the academic literature as the expected returns if no
spin-off events took place. These are estimated over a so called estimation period or simply ‘clean’
period prior to the spin-off event. The estimation period in this thesis is selected as 200 days until 50
days prior to the event day (see figure 2). This estimation period is consistent with other recent
academic studies. The OLS market model to calculate normal returns is formulated as follows:
Ri,t = αi + βi Rm,t + εi,t
(1)
In this formula, Ri,t is the normal return on day t of firm i’s common stock. Where the parameters αi
and βi are estimated using an OLS regression analysis. The market return, Rm,t, is based on the
exchange index of the firm’s home market. Table 8 presents an overview of these country-specific
benchmarks as used in the OLS regression analyses. Parameter εi,t is a residual term with an expected
value of zero.
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Master Thesis Financial Management
Value creation from corporate restructuring
Estimation period
Event window
T-200 days
T-50 days
T-10 days
T
T+10 days
Event day
Observation period
Figure 2: The event study time frame
Table 8
Country-specific benchmarks.
Countries
Country-specific benchmarks
Belgium
BEL 20 Index
Denmark
OMX Copenhagen 20 Index
Finland
OMX Helsinki 25 Index
France
CAC 40 Index
Germany
DAX 30 Index
Greece
ATHEX 20 Index
Ireland
ISEQ 20 Index
Italy
MIB 30 Index
Norway
OBX 25 index
Spain
IBEX 35 Index
Sweden
OMX Stockholm 30 Index
Switzerland
SIX Swiss 20 index
The Netherlands
AEX 25 Index
The United Kingdom
FTSE 100 Index
This table presents the country specific benchmarks used in the OLS regression analyses. These indices are
collected using Thomson Financial DataStream.
The spin-off announcement dates from the SDC database and ZEPHYR database are marked as the
event date (T) and will be defined as day 0 in the continuation of this thesis. An event window of 10
days prior to the spin-off announcement until 10 days after the spin-off announcement is selected to
capture the effects of rumors. For each firm in the sample, the abnormal returns over the [-10, 10]
event window are calculated as follows:
ARi,t = ri,t – Ri,t = ri,t – αi – βi Rm,t
(2)
Where ri,t is the actual return on day t of the firm i's stock. For each day in the event window [-10, 10],
the average abnormal return is computed by averaging across 131 firms in the sample. Using average
numbers is reasonable to cancel out any noise affected by an individual stock return, for instance in the
t) for day t are computed
case of an individual outlier in the dataset. The average abnormal returns (AR
as follows:
ARt =
N
∑N
AR ,
(3)
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Master Thesis Financial Management
Value creation from corporate restructuring
To capture the total impact of spin-off announcements on shareholder returns, cumulative average
abnormal returns (CAR) are computed for several time windows as follows:
CAR(T1, T2) = ∑
ARt
(4)
Where ‘t1’ and ‘t2’ stand for the number of days prior to the spin-off announcement and the number of
days after the announcement respectively. A student T-test is used to test whether the cumulative
abnormal returns are statistically significant different from zero. Following the assumptions from
Brown and Warner (1985) of independently and identically distributed (iid) abnormal returns, the
student T-statistic for average abnormal returns is generated from the following equation:
t(N-1) ~
AR
SAR
(5)
t) is the sample standard
Where in this formula (N-1) is defined as the degrees of freedom and S(AR
deviation error of the mean of stock returns during the estimation period [-200, -50]. The student Tstatistic for the cumulative abnormal returns is formulated as follows:
CAR ,
t(N-1) ~ SAR
√
(6)
Where √t t is the factor used in scaling the daily standard error for the period [t1, t2].
5.3.2 The methodology for calculating long-run abnormal returns
Calculating long-run abnormal returns engender some statistical difficulties30. Barber and lyon (1997)
enumerate in their paper several kind of biases involved in long-run methodologies. For instance, the
new listing bias implies that the off-spring firms are biased upward if the expected returns proxy (or
say the benchmark) is determined in such a way that it could be influenced by the new listing of the
off-spring firms. Therefore, many long-run methodologies are biased toward finding positive
abnormal returns for off-spring firms. The authors conclude that the new listing bias is very likely to
occur in the case that a market index is used as benchmark. Furthermore, theory by Fama and French
(1989) claims that skewness of returns is more likely in studies with long horizons and that skewness
causes a severe downward bias to the T-statistic.
In this thesis, the long-run market performance is examined by calculating buy-and-hold
abnormal returns (BHAR). The commonly accepted matching firm approach of Barber and Lyon
(1997) will be applied for benchmarking and hence not a market index as used in the study by
Kirchmaier (2003). The choice for the matching firm approach in this thesis is consistent with the used
methodology in the study by Veld and Veld-Merkoulova (2004) as well. The matching firm approach
30
See e.g. Barber and Lyon (1997) and Brav (2000) for a discussion about the various methods.
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Master Thesis Financial Management
Value creation from corporate restructuring
implies that for each firm in the sample a matching firm in the same industry is assigned based on
characteristics as size and market-to-book ratios31. More specifically, a peer analysis in the Amadeus
database is applied to find the closest comparable firms. The closest matching firm as indicated by the
peer analysis is assigned as the first matching firm and the second closest is assigned as the second
matching firm and so on. Next, the stock returns of the sample firms and matching firms are collected
using Thomson Financial DataStream. Accordingly, the stock returns of the individual sample firm
will be compared to that of the closest matching firm. If there is a lack of information about the first
closest matching firm then the second closest matching firm will be used and so on. The T-month buyand-hold returns (BHR) for sample firm ‘j’ are defined as:
BHRj, (t1, T) = [ ∏T
1+ rj,t) ] – 1
(7)
Equation 7 measures the total return from a buy-and-hold strategy where a stock of firm j is purchased
at t1 which is the first market price after a spin-off is performed and held for a (t1 to T) period.
Accordingly, rj,t is the return of sample firm j on day t. The buy-and-hold returns for the corresponding
matched firm (benchmark) ‘i’ are defined as:
BHRi, (t1, T) = [ ∏T
1+ ri,t) ] – 1
(8)
In equation 8, ri,t stands for the return of the matched firm i on day t. These returns are calculated over
a period from the first trading day t1 to day T. Thus, since the buy-and-hold returns for each firm are
computed over identical intervals, the buy-and-hold abnormal returns (BHAR) are determined as
follows:
BHARj, (t1, T) = BHRj, (t1, T) – BHRi, (t1, T)
(9)
) are determined for several periods. The used
Next, the average buy-and-hold abnormal returns (BHAR
equation is as follows:
BHAR (t1, T) =
N
∑N
BHARj, (t1, T)
(10)
Where in equation 10 ‘N’ is the total sample size. To test the null hypothesis of zero average buy-andhold abnormal returns, the T-statistic proposed by Barber and Lyon (1997) is used. The T-statistic is
defined as follows:
,T
BHAR
,T"/√N
t(N-1) ~ S!BHAR
31
(11)
Size is defined as the market value of equity in this case.
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Master Thesis Financial Management
Value creation from corporate restructuring
t , T" is the sample standard deviation error and (N-1) is defined as
Where in equation 10, S!BHAR
the degrees of freedom. Moreover, equation 11 needs the assumption of independently and identically
distributed BHARj, (t1, T) (j = 1,…,N), in such a way that in the case of a large N (central limit theorem),
the variables will have an approximately normal distribution.
In this thesis, the long-run abnormal returns are computed for the parent firms, off-spring firms and for
the pro-forma combined firms. In recent literature there is a discussion whether equal-weighted or
value-weighted returns should be used to determine the long-run abnormal returns. Loughran and
Ritter (2000) prefer equal-weighted returns above value-weighted returns from a practice point of view
where investors want to estimate abnormal returns associated with a random spin-off event.
Nevertheless, Fama (1998) prefers value-weighted returns since it should capture the total
shareholders wealth effects more accurately. Veld and Veld-Merkoulova (2004) preferred in their
analyses on long-run abnormal returns of European spin-offs the perspective of equal-weighted returns
since they assume a spin-off transaction as a random event. The long-run abnormal returns will be
calculated on a value-weighted basis as well as on an equal-weighted basis in section 6.332.
5.3.3 The change in operating performance methodology
The methodology that will be used in this thesis to measure changes in operating performance after a
spin-off is undertaken comes from Daley et al. (1997). The idea behind this methodology is to
compare the changes in operating performance of the combined firms (a portfolio consisting of parent
firms and off-spring firms) with those of the pre-spin-off firms which are accordingly benchmarked to
the industry median. By doing this for a large sample, the methodology controls for industry specific
effects and should only present the firm specific changes as affected by the spin-off. The industry
median figures are collected from Thomson Financial DataStream and firm specific operating
performances in terms of return on assets (ROA) are retrieved from Amadeus.
In this thesis, only one –and two year period changes in operating performance after the spinoffs will be examined. The change in return on assets after a spin-off is compared with the return on
assets of the year when the spin-off is executed. Thus, the total examination window for changes in
operating performance in this thesis concerns [0, 2].
Daley et al. (1997) claim in their paper three reasons why ROA is a suitable performance
measure33. First, ROA figures exclude some components of net income such as taxes and interest
expenses which are not important as operating performance indicators. Secondly, the ROA measure
32
Brav (2000) illustrates a situation in which a sample contains 1000 firms and where 999 firms have a 1 million
dollar market capitalization and where one firm has a market capitalization of 1001 million dollar market
capitalization. With the assumption that these 999 firms have all underperformed by an equal percentage of 50%
and that this one firm has overperformed by 50%, an equal-weighted approach should lead to a severe mispricing
of -50%. A value-weighted approach should however conclude that the sample performance is approximate zero.
33
Return on assets (ROA) is defined as the ratio of operating earnings to total assets.
43
Master Thesis Financial Management
Value creation from corporate restructuring
also excludes the effect of any special one-time charges to net income. Thirdly, ROA incorporates
both efficiency effects from changes in asset turnover (sales/assets) and changes in the firm’s profit
margin (income/sales)34.
Changes in operating performance as measured by ROA are calculated using the three steps
procedure by Daley et al. (1997). The first step is to compute the adjusted ROA for firm j on time t:
AROAj,t = ROAj,t – IROAj, t
(12)
Where ROAj, t is the actual return on assets for firm j on time t and IROAj,t is the average ROA of the
industry on time t. This procedure results in the industry adjusted ROA. The second step is to
determine the change in the industry adjusted ROA as the difference between the pre-spin-off AROAj, t
and the post-spin-off AROAj, t. Thus, it is calculated as follows:
∆AROAj = AROAj, ex-post – AROAj, ex-ante
(13)
The measure applied to detect changes in operating performance in the sample is the average change
in industry adjusted return on assets (∆AROAj). Therefore the average change is:
∆'()' = Average (∆AROAj)
(14)
The student T-test to determine statistical significance is given as:
t(N-1) ~
∆*+,*
S∆*+,*
(15)
) is the standard error of the change in the industry adjusted returns on
In formula (15), S(∆'()'
assets.
34
ROA = profit margin x asset turnover
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Master Thesis Financial Management
Value creation from corporate restructuring
6. Empirical results
In this section, the empirical results of the executed analyses with respect to the value effects of
European spin-offs are organized as follows. First, section 6.1 shows the abnormal returns of the
parent firms around the spin-off announcement period. Secondly, section 6.2 analyzes the short-run
wealth effects more specifically using cross-sectional tests and regression analyses. Thirdly, the results
regarding the long-run abnormal returns over a two-year period after the spin-off announcement date
are presented in section 6.3. Next, the long-run abnormal returns are analyzed accordingly in section
6.4. Finally, changes in operating performance of the parent firm over a two year period are presented
in section 6.5.
6.1 Announcement period abnormal returns
Table 9 shows the cumulative average abnormal returns to the parent firms’ shareholders estimated
over five different event windows: [-10, -1], [-1, 0], [0], [-1, +1] and [+1, +10]. The results were
obtained using an event study with an OLS market model approach and based on a clean period of
[-200, -50] for a sample of 131 spin-offs.
Table 9
Short-run abnormal returns.
Cumulative abnormal returns (CAR)
Event period
Mean (%)
T-statistic
Percentage positive (%)
Entire sample (N=131)
[-10, -1]
-0.05***
-0.07
49.31
[-1, 0]
1.80***
2.61
51.91
[0]
1.73***
2.69
52.67
[-1, +1]
2.90***
3.26
50.13
[+1, +10]
0.86***
0.89
47.48
This table shows the event study results for the European spin-off announcement effects from January 1998 to
December 2007. The results are based on five different event windows: [-10, -1], [-1, 0], [0], [-1, +1] and
[+1, +10]. The mean figures are in percentages. The T-statistics are calculated according to the method as
described in section 5.3.1. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **, *
respectively.
Table 9 shows for the entire sample positive cumulative abnormal returns of 2.90% for the event
window from one day prior to the announcement to one day after the announcement. This result is
statistically significant at the 1%-level. The cumulative abnormal returns seem to be relatively low in
the near period before the spin-off announcement which suggests few rumors on beforehand. This is
represented by a cumulative average abnormal return in the [-10, -1] event window of -0.05% which is
however statistically insignificant. Moreover, table 9 shows that there are substantial positive
abnormal returns one day after the transaction which can support the explanation of unclear or no fully
communicated information to shareholders at the announcement day. While table 9 claims substantial
positive shareholder wealth effects around the spin-off announcement day, it is not a guarantee that all
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Master Thesis Financial Management
Value creation from corporate restructuring
spin-offs are even beneficial since only ±50% of all spin-off announcements lead to positive wealth
effects for shareholders.
The short-run results in this thesis are quite similar to those of American studies (see table 1)
and remarkable closely related to the findings of Veld and Veld-Merkoulova (2004), which claim
positive shareholder wealth effects of 2.62% for European spin-offs during the [-1, +1] event window.
Figure 3 shows the development of the cumulative abnormal returns for the entire spin-off
sample. The figure depicts that the announcement of a European spin-off causes substantial positive
abnormal returns for the parent firm shareholders: on the event day, a cumulative abnormal return of
1.73% is realized. In addition, there is a significant increase in the parent firms share prices one day
after the spin-off announcement. Figure 3 also indicates that there are few rumors before the
announcement date since the abnormal returns are close to zero a couple of days before the spin-off
announcement.
0,03
0,025
0,02
0,015
0,01
0,005
0
-10
-8
-6
-4
-2
-0,005
0
2
4
6
8
10
-0,01
CAAR Entire Spin-off sample
Figure 3: Short-run cumulative average abnormal returns around the spin-off announcement day.
6.2 Analysis of short-run wealth effects
In this subsection, empirical results regarding the channels through which value might be created will
be investigated using cross-sectional tests. Next, the results from the univariate and multivariate
regressions will be presented. For the cross-sectional tests as well as for the univariate and multivariate
regressions, the cumulative abnormal returns based on the OLS market model approach over the
[-1, +1] event window will be used.
6.2.1 Cross-sectional tests
In table 10, the short-run cumulative abnormal returns over the [-1, +1] event window are presented in
different subsamples related to the improvement in corporate focus. In panel A, the cumulative
abnormal returns are compared for focus-increasing spin-offs with non-focus-increasing spin-offs
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Master Thesis Financial Management
Value creation from corporate restructuring
based on the change in the two-digit SIC codes. 92 out of 131 firms increased their focus by carrying
out a spin-off. The mean cumulative abnormal return for these firms is 4.73% which is significant at
the 1%-level. On the other hand, the subsample of non-focus-increasing spin-offs shows a negative
mean cumulative abnormal return of -1.15%. However, this figure is not statistically significant. The
difference between the two subsamples is therefore 5.88%, significant at the 1%-level. These results
are in line to the findings by Schipper and Smith (1983) for American spin-offs and by Veld and VeldMerkoulova (2004) for European spin-offs.
Table 10
Cross-sectional tests for the improvement of corporate focus on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on the change in the two-digit SIC codes.
Different two-digit SIC code of parent and off-spring firms
92
4.73***
3.99
64.13
Same two-digit SIC code of parent and off-spring firms
39
-1.15***
-1.19
43.59
Differences
5.88***
2.61
B. Based on newspaper reports.
Reports mentioned ‘corporate refocusing’ or related words
54
3.10***
2.62
61.11
No such reports available
77
2.80***
1.18
55.84
Differences
0.30***
0.10
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. The fourth column represents the T-statistics collected using an
independent t-test in SPSS. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **,
* respectively.
Panel B compares the cumulative abnormal returns of the subsamples based on newspaper reports
quotes such as ‘corporate refocusing’ or related words. The first subsample consists of 54 (out of 131)
firms for which focus related quotes were found in the newspapers. The mean cumulative abnormal
return for these firms is 3.10%, which is significant at the 1%-level. On the other hand, the mean
cumulative abnormal return for the other 77 firms is 2.80%, but is not statistically significant. The
difference (+0.30%) between the two subsamples is much smaller than it was presented in panel A
(+5.88%). However, the difference in panel B has a low t-statistic and is therefore not statistically
significant.
Figure 4 shows the development of short-run cumulative average abnormal returns for focusincreasing spin-offs as well as for non-focus-increasing spin-offs around the announcement day. The
two subsamples in figure 4 are based on the change in the two-digit SIC code. Figure 4 depicts clearly
that the announcement of focus-increasing spin-offs causes substantial positive shareholder wealth
effects. Conversely, figure 4 also depicts that the announcement of non-focus-increasing spin-offs
causes negative shareholder wealth effects. The effects are observable until two days after the
announcement day. After these two days, the abnormal returns development of focus-increasing and
non-focus-increasing spin-offs remain stable since (probably) all relevant information is already
incorporated in the share prices.
47
Master Thesis Financial Management
Value creation from corporate restructuring
0,06
0,05
0,04
0,03
0,02
0,01
0
-10
-8
-6
-4
-2 -0,01 0
2
4
6
8
10
-0,02
-0,03
Focus-increasing spin-offs
Non-focus-increasing spin-offs
Figure 4: The development of short-run cumulative average abnormal returns for focus-increasing spinoffs (blue line) and for non-focus-increasing spin-offs (red line) around the spin-off announcement day.
Table 11 presents the cross-sectional results for the subsamples concerning the level of information
asymmetry in the last month of the year prior to the spin-off announcement on the short-run wealth
effects. The impact of information asymmetry on shareholder wealth effects are measured using three
different proxies: the absolute earnings forecast error (panel A), the standard deviation of earnings
forecasts (panel B) and the normalized earnings forecast error (panel C).
Table 11
Cross-sectional tests for measuring the impact of information asymmetry on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on the absolute earnings forecast error.
High absolute earnings forecast error (30-top)
30
7.43***
2.87
66.67
Low absolute earnings forecast error (30-bottom)
30
0.87***
0.90
46.67
Differences
6.56***
2.28
B. Based on the standard deviation of forecast.
High standard deviation of earnings forecast (20-top)
Low standard deviation of earnings forecast (20-bottom)
Differences
20
20
6.49***
0.76***
5.73***
2.00
1.52
1.70
60.00
45.00
C. Based on the normalized earnings forecast error.
High normalized earnings forecast error (30-top)
30
7.05***
2.71
70.00
Low normalized earnings forecast error (30-bottom)
30
-1.13***
-1.10
43.33
Differences
8.18***
2.91
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. The data with respect to analyst forecasts were collected using the IBES
database. Forecasts are based on the last month of the year prior to the spin-off announcement. The fourth
column represents the T-statistics collected using an independent t-test in SPSS. The 1%, 5% and 10% statistical
significance are represented using asterisks ***, **, * respectively.
48
Master Thesis Financial Management
Value creation from corporate restructuring
Panel A shows that the top 30 spin-offs with the highest absolute earnings forecast error prior to the
announcement day triggers substantial positive cumulative abnormal returns of 7.43% over an event
window of [-1, +1]. This figure is statistically significant at the 1%-level. Panel A also shows that the
percentage of positive cumulative abnormal returns for spin-offs involved with high information
asymmetry is higher compared to the entire sample (66.67% versus 46.67%). The bottom 30 spin-offs
with the lowest absolute earnings forecast error prior to the announcement day has a mean cumulative
abnormal return of +0.87% but is not statistically significant. The mean cumulative abnormal returns
between the two subsamples differ 6.56% which is significant at the 5%-level.
In panel B of table 11, the results are based on the standard deviation of earnings forecasts
prior to the announcement day. The results are quite consistent with those of panel A showing a
substantial outperformance of spin-offs involved with high levels of information asymmetry (+6.49%)
compared to spin-offs involved with low levels of information asymmetry (+0.76%). The difference
between the two subsamples is therefore +5.73% significant at the 10%-level.
In panel C, the results are divided into two subsamples based on the normalized earnings
forecast error. As explained in section 5.2, this proxy takes into account that forecast errors are more
likely when earnings volatilities are higher. The top 30 spin-offs with the highest normalized earnings
forecast error shows substantial positive shareholder wealth effects of 7.05%, significant at the 1%level. Strikingly, the results for the bottom 30 spin-offs with the lowest normalized earnings forecast
error turn out a negative association between information asymmetry and shareholder wealth effects
(-1.13%). However, this figure is not statistically significant.
The results of table 11 are in line with those of Krishnaswami and Subramaniam (1999) for
American spin-offs. They found a positive association of information asymmetry on shareholder
wealth effects with a magnitude of 9.10%35. However, Veld and Veld-Merkoulova (2004) found a
negative association between the level of information asymmetry and shareholder wealth effects but is
not statistically significant.
Figure 5 presents the development of short-run cumulative average abnormal returns for spinoffs involved with high levels of information asymmetry and for spin-offs involved with low levels of
information asymmetry. The two subsamples are based on the normalized earnings forecast error
proxy. Figure 5 depicts clearly that spin-offs involved with high levels of information asymmetry
cause substantial positive shareholder wealth effects around the announcement day. On the other hand,
figure 5 also shows that spin-offs involved with low levels of information asymmetry seem to have no
impact on shareholder wealth effects since the cumulative abnormal returns are close to zero even after
the announcement day. Moreover, figure 5 shows that the anomaly of cumulative average abnormal
returns between firms involved with high and low levels of information asymmetry is huge.
35
Krishnaswami and Subramaniam (1999) used the normalized earnings forecast error as proxy for measuring
the impact of information asymmetry on shareholder wealth effects.
49
Master Thesis Financial Management
Value creation from corporate restructuring
0,09
0,08
0,07
0,06
0,05
0,04
0,03
0,02
0,01
0
-10
-8
-6
-4
-2 -0,01 0
2
4
6
8
10
-0,02
High information asymmetry on beforehand
Low information asymmetry on beforehand
Figure 5: The development of short-run cumulative average abnormal returns for spin-offs involved with
high levels of information asymmetry (blue line) and with low levels of information asymmetry (red line),
based on the normalized earnings forecast error.
Table 12 shows the results of the cross-sectional test concerning the improvement of geographical
focus on short-run wealth effects. The entire sample is divided into two subsamples based on whether
a foreign division is spun-off. The mean cumulative abnormal return for firms (12 out of 131) that
announced a spin-off of a foreign division is -0.91%, but is statistically insignificant. On the other
hand, non-geographical-improved spin-offs trigger positive cumulative abnormal returns of 3.29%,
significant at the 1%-level. Therefore, the difference between the two subsamples is 4.20%, which is
however not statistically significant.
The results are in line with those of Veld and Veld-Merkoulova (2004) who claim significant
positive cumulative abnormal returns of +2.65% for non-geographical-improved spin-offs over a time
window of [-1, +1], significant at the 1%-level. Moreover, they also claim that geographical-improved
spin-offs seem to have no impact on short-run wealth effects since they found a statistically
insignificant figure for this subsample.
Table 12
Cross-sectional tests for the improvement of geographical focus on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on whether a foreign division is spun-off.
Geographical-improved spin-offs
12
-0.91***
-0.30
58.33
Non-geographical-improved spin-offs
119
3.29***
3.54
57.98
Differences
4.20***
0.50
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. The sample is divided into two subsamples based on whether a foreign
division is spun-off. This information is retrieved from the SDC platinum database. The fourth column
represents the T-statistics collected using an independent t-test in SPSS. The 1%, 5% and 10% statistical
significance are represented using asterisks ***, **, * respectively.
50
Master Thesis Financial Management
Value creation from corporate restructuring
Figure 6 depicts the development of short-run cumulative average abnormal returns for geographicalimproved spin-offs and for non-geographical-improved spin-offs. It shows clearly that nongeographical-improved spin-offs affect substantial positive shareholder wealth effects around the
announcement day. More strikingly is the development of the short-run cumulative average abnormal
returns for geographical spin-offs since there is no clear pattern after the announcement day. The stock
market seems to esteem geographical-improved spin-offs for a while, especially in the [-1, 0] event
window, but the effect reverses after the announcement day. Four days after the announcement day,
the cumulative average abnormal returns increase suddenly again and remain slightly volatile in the
[+6, +10] event window. Important to note, the development of the short-run cumulative average
abnormal returns as depicted in figure 6 is not very reliable since it is based on only twelve
observations36.
0,035
0,03
0,025
0,02
0,015
0,01
0,005
0
-10
-8
-6
-4
-2 -0,005 0
2
4
6
8
10
-0,01
-0,015
Non-geographical-improved spin-offs
Geographical-improved spin-offs
Figure 6: The development of short-run cumulative average abnormal returns for non-geographicalimproved spin-offs and for geographical-improved spin-offs.
Table 13 on the next page presents the results of the cross-section test using 6 different subsamples
based on differences in shareholder protection. The level of shareholder protection is referred to the La
Porta et al. (1998) shareholder right index. This index ranges from zero (very low shareholder
protection) until five (very high shareholder protection). Low levels of shareholder protection include
countries with index figures equal to 0, 1, 2 and 3. Accordingly, high levels of shareholder protection
include countries with index figures equal to 4 and 5. This classification is used in the paper by Veld
and Veld-Merkoulova (2004) as well.
Panel A shows that the subsample with zero shareholder protection has a mean cumulative
abnormal return of 0.77%. Moreover, the T-statistic is quite low (0.55) and is therefore statistically
36
There are available too few geographical-increasing spin-offs (12 out of 131) in the entire sample to detect
clearly outliers. Therefore, all 12 geographical-increasing spin-off observations are included in the subsample.
51
Master Thesis Financial Management
Value creation from corporate restructuring
insignificant. The second subsample contains spin-offs with a one-rating on the La Porta et al. (1998)
shareholder right index, it shows a mean cumulative abnormal return of 2.46%, which is not
statistically significant. The subsample with a rating of two on the shareholder right index shows a
negative mean cumulative abnormal return of -1.19%, which is not statistically significant. The
subsamples with a three, four and five classification on the shareholder right index show mean
cumulative abnormal returns of 3.33%, 4.10% and 4.13% respectively. However, the subsample with a
four-rating on the shareholder right index is not statistically significant. At first sight, it seems to be in
line with the theory (as described in section 2.3.4) that spin-offs performed in countries with high
shareholder protection are positively associated with shareholder wealth effects.
To compare the differences in wealth effects between spin-offs performed in countries with
low -and high shareholder protection, the entire sample is divided into two subsamples: low
shareholder protection (rating with 0, 1, 2 and 3) and high shareholder protection (rating with 4 and 5).
Table 13 shows that shareholders will benefit substantially when spin-offs are undertaken in countries
with high shareholder protection with a positive mean cumulative abnormal return of 4.12%,
significant at the 1%-level. The subsample with low shareholder protection (0, 1, 2 and 3) presents a
positive mean cumulative abnormal return of 2.05%, significant at the 5%-level. Nevertheless, the
difference (2.07%) between the two subsamples is not statistically significant.
Table 13
Cross-sectional tests for differences in corporate governance on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on the La Porta et al. (1998) shareholder right index.
0 (very low)
6
0.77***
0.55
33.33
1
26
2.46***
0.99
61.54
2
13
-1.19***
-1.12
53.84
3
34
3.33***
2.30
52.94
4
15
4.10***
1.01
53.33
5 (very high)
37
4.13***
2.67
62.16
Low shareholder protection (0, 1, 2 and 3)
52
2.05***
2.01
56.96
High shareholder protection (4 and 5)
79
4.12***
2.60
59.62
Differences
2.07***
0.92
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. The level of shareholder protection is based on the La Porta et al. (1998)
shareholder right index. Low levels of shareholder protection include countries with index figures equal to 0, 1, 2
and 3. High levels of shareholder protection include countries with index figures equal to 4 and 5. The fourth
column represents the T-statistics collected using an independent t-test in SPSS. The 1%, 5% and 10% statistical
significance are represented using asterisks ***, **, * respectively.
52
Master Thesis Financial Management
Value creation from corporate restructuring
The results in table 13 are consistent with the findings of Veld and Veld-Merkoulova (2004) that there
is no difference in shareholder wealth effects of European spin-offs between countries with different
corporate governance systems.
Figure 7 depicts the development of short-run cumulative average abnormal returns for spinoffs undertaken in countries with low –and high shareholder protection around the announcement day.
The two subsamples are based on the same classifications as in table 13. Figure 7 shows three
important observations. First, both subsamples cause substantial positive shareholder wealth effects on
the day of announcement and thereafter. Secondly, there seems to be no difference in the magnitude of
shareholder benefits between the two subsamples after the announcement day. Thirdly, there is a
striking anomaly between the two subsamples in the [-4, -1] rumor period. In this period, the market
has a negative perception about spin-offs that are undertaken in countries with high shareholder
protection. Subsequently, on the day of the spin-off announcement, shareholders will be better
informed, e.g. about the form of restructuring, where after many uncertainties will disappear.
0,05
0,04
0,03
0,02
0,01
0
-10
-8
-6
-4
-2
0
2
4
6
8
10
-0,01
-0,02
Low shareholder protection
High shareholder protection
Figure 7: The development of short-run cumulative average abnormal returns for spin-offs undertaken in
countries with low –and high shareholder protection.
Table 14 presents the results of the cross-sectional test for measuring the impact of spin-off size on
short-run wealth effects. The relative spin-off size is defined as the ratio of total assets of the offspring firm and the total assets of the pre-spin-off firm. The 30 smallest sized spin-offs are selected to
represent the ‘small sized spin-offs’ subsample and the 30 biggest sized spin-offs are chosen to
represent the ‘big sized spin-offs’ subsample. According to the results in table 14, the mean
cumulative average abnormal return of the small sized spin-off subsample is +0.17% (statistically
insignificant). Hence, small sized spin-offs seem to have no impact on shareholder wealth effects in
the short-run. On the other hand, the mean cumulative abnormal return of the big sized spin-off
53
Master Thesis Financial Management
Value creation from corporate restructuring
subsample is quite large (+7.58%) and statistically significant at the 1%-level. Furthermore, the
difference between the two subsamples is +7.41%, which is statistically significant at the 1%-level.
Table 14
Cross-sectional test for the impact of spin-off size on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on the ratio of total assets of the off-spring firm and the total assets of the pre-spin-off firm.
Small sized spin-offs (30-bottom)
30
0.17***
0.16
40.00
Big sized spin-offs (30-top)
30
7.58***
2.99
73.33
Differences
7.41***
2.62
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. The spin-off size is defined as the ratio of total assets of the off-spring
firm and the total assets of the pre-spin-off firm. The fourth column represents the T-statistics collected using an
independent t-test in SPSS. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **,
* respectively.
The results are in line with the findings by Schipper and Smith (1983) for American spin-offs. They
found positive significant announcement effects when the relative spin-off size is bigger. However,
Kirchmaier (2003) claims a negative association between the relative spin-off size and shareholder
wealth effects based on a sample of European spin-offs. Conversely, study by Veld and VeldMerkoulova (2004) support the results of Schipper and Smith (1983) using a sample of European spinoffs as well. The results in this thesis as presented in table 14 strongly support the latter one.
0,1
0,08
0,06
0,04
0,02
0
-10
-8
-6
-4
-2
-0,02
0
2
4
6
8
10
-0,04
Big sized spin-offs
Small sized spin-offs
Figure 8: The development of short-run cumulative average abnormal returns for big sized spin-offs and
for small sized spin-offs.
Figure 8 shows the development of short-run cumulative average abnormal returns for big sized spinoffs and for small sized spin-offs. The two subsamples are based on the relative spin-off size, which
has the same classification as in table 14. The figure depicts clearly one important observation, namely
the difference in shareholder wealth effects between big sized spin-offs and small sized spin-offs. At
54
Master Thesis Financial Management
Value creation from corporate restructuring
the day of announcement, big sized spin-offs trigger substantial positive wealth effects for
shareholders while small sized spin-offs have no or very little impact.
Table 15
Cross-sectional test for the impact of timing on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on the level of stock market indices.
Year 1998 (moderate)
15
1.01***
0.66
46.67
Year 1999 (hot)
8
7.80***
1.11
37.50
Year 2000 (hot)
16
4.21***
1.66
56.25
Year 2001 (moderate)
14
-0.54***
-0.17
50.00
Year 2002 (cold)
4
-0.17***
-0.06
50.00
Year 2003 (cold)
10
2.79***
1.31
50.00
Year 2004 (cold)
13
4.66***
1.05
61.54
Year 2005 (moderate)
17
3.00***
2.80
70.59
Year 2006 (hot)
16
1.85***
1.68
62.50
Year 2007 (moderate)
18
4.08***
1.58
72.22
Announcements during a cold market
Announcements during a hot market
Differences
27
40
3.25***
3.98***
0.73***
1.42
2.27
0.78
55.56
55.00
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. Years selected as hot markets are 1999, 2000 and 2006. Cold markets are
years 2002, 2003 and 2004. The fourth column represents the T-statistics collected using an independent t-test in
SPSS. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **, * respectively.
Table 15 presents the short-run cross-sectional results for each year of the sample period. Furthermore,
the results for the two subsamples ‘cold market’ and ‘hot market’ are based on the level of the stock
market indices. Cold markets are defined as the years 2002, 2003 and 2004 where market indices were
relatively low. On the other hand, hot markets are defined as the years 1999, 2000 and 2006 were
market indices were relatively high. Table 15 shows that the mean cumulative abnormal returns are
positive in all years with exception of years 2001 and 2002. However, the negative mean cumulative
abnormal returns are not statistically significant. Moreover, only three positive mean cumulative
abnormal returns are statistically significant. Year 2005 has a positive mean cumulative abnormal
return with a magnitude of 3.00%, which is significant at the 1%-level. The subsamples for years 2000
and 2006 represent positive mean cumulative abnormal returns of 4.21% and 1.85% respectively, both
statistically significant at the 10%-level. Due to the lack of significant cross-sectional results, it is
quite difficult to find a particular pattern or to explain differences between spin-offs which are
executed during a hot market and those executed during a cold market. To prevent that statistically
insignificant figures are caused by a low number of observations, the subsamples of years 1999, 2000
and 2006 are added up into the subsample ‘announcements during a hot market’ and the same logic is
applied for years 2002, 2003 and 2004 into the subsample ‘announcements during a cold market’. The
subsample for spin-offs exercised during a cold market has a positive mean cumulative abnormal
55
Master Thesis Financial Management
Value creation from corporate restructuring
return of 3.25%, but is again not statistically significant. Based on a subsample size of 40 spin-off
events, announcements during a hot market were result in a positive mean cumulative abnormal return
of 3.98%, significant at the 5%-level. Therefore, the difference between the two subsamples is 0.73%
(not statistically significant). Hence, the timing of a spin-off announcement seems to have no impact
on shareholder wealth effects.
0,06
0,05
0,04
0,03
0,02
0,01
0
-10
-8
-6
-4
-2
-0,01
0
2
4
6
8
10
-0,02
Spin-offs executed during hot markets
Spin-offs executed during cold markets
Figure 9: The development of short-run cumulative average abnormal returns for spin-offs executed
during hot markets and spin-offs executed during cold markets.
Figure 9 depicts the development of short-run cumulative average abnormal returns for spin-offs
executed during a hot market and spin-offs executed during a cold market. This figure shows that both
subsamples follow approximately the same pattern, namely substantial positive shareholder wealth
effects at the day of announcement and this effect remains quite stable over time. Spin-offs executed
during a hot market seem to outperform spin-offs which are executed during a cold market according
to figure 9. However, the results as presented in table 15 could not statistically confirm this
observation.
Table 16 shows the results of the cross-sectional test for the impact of corporate control on short-run
shareholder wealth effects. To measure this impact, the entire sample is divided into two subsamples.
Subsample one includes spin-offs were a takeover threat was present prior to the announcement day
and the second subsample includes spin-offs were a takeover threat was not present. In this thesis, a
takeover threat is defined as an increased equity stake of at least 15% by a competitive firm during
twelve months prior to the spin-off announcement day or when there was a takeover threat mentioned
in the newspaper reports. Otherwise, it is assumed that there was no takeover threat prior to the
56
Master Thesis Financial Management
Value creation from corporate restructuring
announcement day37. Table 16 shows that the subsample of spin-offs that are involved with a takeover
threat prior to the announcement day has a mean cumulative abnormal return of +6.72%, significant at
the 1%-level. Moreover, roughly 64% of the spin-offs in this subsample present positive cumulative
average abnormal returns in the [-1, +1] time window. The second subsample (including spin-offs
without any indication of a takeover threat) has a mean cumulative abnormal return of +1.57% and is
statistically significant at the 10%-level. Roughly 55% of the spin-off events in this subsample have a
positive cumulative average abnormal returns. The difference between the two subsamples is 5.15%
(significant at the 5%-level).
The results as presented in table 16 are consistent with those of the findings by Cusatis et al.
(1993) for American spin-offs. Boreiko and Murgia (2010) claim the same conclusions based on a
sample of European spin-offs however they did not find strong significant difference between the two
subsamples (2.30%). The results in table 16 seem to confirm the findings of Cusatis et al. (1993) and it
presents a more conclusive difference between the two subsamples than in the study by Boreiko and
Murgia (2010) with a magnitude of 5.15% based on a sample of European spin-offs as well.
Table 16
Cross-sectional test for the presence of a takeover threat on short-run wealth effects.
Cumulative abnormal returns (CAR)
Description
N
Mean (%)
T-statistic
% positive
A. Based on whether there was a takeover threat 12 days prior to the announcement day.
A takeover threat was present prior to the announcement
34
6.72***
2.91
64.71
A takeover threat was not present prior to the announcement
97
1.57***
1.82
55.67
Differences
5.15***
2.03
The cumulative average abnormal returns over an event window of [-1, +1] are used to test the subsamples. The
mean figure is defined in percentages. A takeover threat is defined as an increased equity stake of at least 15%
by a competitive firm during twelve months prior to the spin-off announcement or when there was a takeover
threat mentioned in newspaper reports. Otherwise, it is assumed that there was no takeover threat prior to the
announcement. The fourth column represents the T-statistics collected using an independent t-test in SPSS. The
1%, 5% and 10% statistical significance are represented using asterisks ***, **, * respectively.
Figure 10 depicts the development of short-run cumulative average abnormal returns for spin-offs
involved with a takeover threat prior to the announcement and for spin-offs without such kind of
takeover threat. This figure shows a substantial positive outperformance of spin-offs which are
involved in a takeover threat, especially in the [-1, +1] event window. After this period, the cumulative
average abnormal returns remain quite stable over time. An identical pattern can be observed for spinoffs which are not involved in a takeover threat. However, figure 10 shows clearly that the magnitude
of the effect in the [-1, +1] event window is much smaller for this subsample compared to the
subsample including spin-offs with a certain takeover threat. Furthermore, figure 10 depicts the clear
difference between the two subsamples as it was presented in table 16 before.
37
The observation of an increased equity stake is obtained using the Amadeus database and LexisNexis is used
to find any indication of a takeover threat as mentioned in newspaper reports. This methodology is applied in the
paper by Boreiko and Murgia (2010) as well.
57
Master Thesis Financial Management
Value creation from corporate restructuring
0,08
0,07
0,06
0,05
0,04
0,03
0,02
0,01
0
-10
-8
-6
-4
-2 -0,01 0
Spin-offs involved with a takeover threat
2
4
6
8
10
Spin-offs involved without a takeover threat
Figure 10: The development of short-run cumulative average abnormal returns for spin-offs involved with
a takeover threat prior to the announcement and for spin-offs without a takeover threat.
6.2.2 Regression analyses
On the following pages, the results of the univariate (table 17) and multivariate (table 19) OLS
regression analyses are presented for the cumulative average abnormal returns of the spin-off events
over the three-day interval surrounding the announcement day. Although the total sample size includes
131 spin-off announcements, the number of observations in the regression analyses is 91. Hence, only
the completed spin-offs are considered in the regression analyses. This is caused by the inclusion of
size as independent variable since this data is only available when the spin-off is really executed. The
independent variables are abbreviated in the regression analyses as follows: FOC_SIC is a dummy
variable with value 1 if the parent firm and the off-spring firm have a different two-digit SIC code and
is 0 otherwise. FOC_REPORT is a dummy variable that takes the value 1 if a newspaper reports
corporate refocusing or related words, otherwise it is 0. FC_ERROR is the absolute earnings forecast
error as explained before. FC_STD is the standard deviation of earnings forecasts. FC_NORM is the
normalized forecast error. FOC_GEO is a dummy variable with value 1 if a foreign subsidiary is spunoff and 0 if a domestic subsidiary is spun-off. SHR_RIGHT is the La Porta et al. (1998) shareholder
right index that ranges from zero to seven. REL_SIZE is a ratio of the assets that are spun-off over the
total assets of the parent firm prior to the spin-off transaction. COLD_MRKT is a dummy variable
with value 1 if the spin-off announcement took place in times of low market indices, otherwise 0.
HOT_MRKT is a dummy variable that takes value 1 if the spin-off took place in times of high market
indices and takes 0 otherwise. Finally, TO_THREAT is a dummy variable with value 1 if there was a
takeover threat twelve months preceding to the spin-off announcement and zero otherwise.
Table 17 presents the results of the executed univariate regression. This kind of regression
methods measures the single impact of a particular variable on the dependent variable and it is quite
suitable as starting point in the subsequent multivariate regression analyses (table 19).
58
Table 17
Univariate regression results of short-run cumulative abnormal returns for (completed) spin-offs.
Variables
Intercept
Expected sign
FOC_SIC
+
FOC_REPORT
+
FC_ERROR
+
FC_STD
+
FC_NORM
+
FOC_GEO
+/-
SHR_RIGHT
=
REL_SIZE
+
COLD_MRKT
=
HOT_MRKT
=
TO_THREAT
+
(1)
-0.35
(-0.17)
5.83**
(2.37)
(2)
4.33***
(3.04)
(3)
0.58
(0.48)
(4)
-10.55***
(-2.94)
(5)
0.91
(0.69)
(6)
3.94***
(3.38)
(7)
4.03
(1.44)
(8)
-2.05
(-1.07)
(9)
3.67***
(2.95)
(10)
3.09**
(2.33)
(11)
2.41*
(1.91)
-1.01
(-0.44)
3.59***
(4.12)
14.70***
(4.73)
3.08***
(3.02)
0.03
(0.01)
-0.03
(-0.04)
0.21***
(3.99)
1.35
(0.48)
2.87
(1.18)
5.79**
(2.35)
R-Square
0.059
0.002
0.188
0.427
0.111
0.000
0.000
0.222
0.003
0.015
0.059
Adj. R-Square
0.049
-0.009
0.177
0.408
0.099
-0.011
-0.011
0.208
-0.009
0.004
0.048
F-statistic
5.606
0.195
16.94
22.38
9.108
0.000
0.001
15.93
0.231
1.400
5.538
Sig.
0.020
0.660
0.000
0.000
0.004
0.995
0.971
0.000
0.632
0.240
0.021
This table includes the regression coefficients for the three-day cumulative average abnormal returns for only 91 (completed) spin-off announcements by European firms from
January 1998 to December 2007. FOC_SIC is a dummy variable with value 1 if the parent firm and the off-spring firm have a different two-digit SIC code and is 0 otherwise.
FOC_REPORT is a dummy variable that takes the value 1 if a newspaper reports corporate refocusing or related words, otherwise it is 0. FC_ERROR is the absolute earnings
forecast error as explained before. FC_STD is the standard deviation of earnings forecasts. FC_NORM is the normalized forecast error. FOC_GEO is a dummy variable with
value 1 if a foreign subsidiary is spun-off and 0 if a domestic subsidiary is spun-off. SHR_RIGHT is the La Porta et al. (1998) shareholder right index that ranges from zero to
seven. REL_SIZE is a ratio of the assets that are spun-off over the total assets of the parent firm prior to the spin-off transaction. COLD_MRKT is a dummy variable with
value 1 if the spin-off announcement took place in times of low market indices, otherwise 0. HOT_MRKT is a dummy variable that takes value 1 if the spin-off took place in
times of high market indices and takes 0 otherwise. Finally, TO_THREAT is a dummy variable with value 1 if there was a takeover threat twelve months prior to the spin-off
announcement and zero otherwise. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **, * respectively.
Master Thesis Financial Management
Value creation from corporate restructuring
The first regression in table 17 shows that an increase in corporate focus (FOC_SIC) has a positive
coefficient which is significant at the 5%-level. This result is strongly in line with the expected sign
and even with the earlier reported results from the cross-sectional tests. The second regression (based
on the FOC_REPORT variable) shows that the coefficient is even negative but is however not
statistically significant. Therefore, the results from the second univariate regression analyses confirm
the results from the cross-sectional test as well. The third, fourth and fifth regressions measure the
impact of the level of information asymmetry before the spin-off announcement on shareholder wealth
effects over the [-1, +1] event window. All regressions show positive significant coefficients
confirming that spin-offs involved with higher information asymmetry on beforehand will result in
higher shareholder wealth effects. This is consistent with the cross-sectional results and with the
theoretical framework (section 2.3.2) that a spin-off can facilitate a mitigation of information
asymmetry effectively and that it is really esteemed by shareholders. However, these results contradict
the findings by Veld and Veld-Merkoulova (2004) who claim a negative association between the level
of information asymmetry and shareholder wealth effects. Nevertheless, the results in this thesis
support the earlier findings by Krishnaswami and Subramaniam (1999) of a positive association.
Regression (6) presents a positive coefficient for FOC_GEO but is statistically insignificant. This is
probably caused by the fact that the positive effects of a geographical-improved spin-off are canceled
out by the negative effects. The result is completely in line with the finding from the cross-sectional
test and that of Veld and Veld-Merkoulova (2004). Regression (7) measures the single impact of
corporate governance on shareholder wealth effects. Consistent with the cross-sectional results as
presented in table 13, the shareholder right (SHR_RIGHT) coefficient is statistically insignificant.
This implies that differences in shareholder protection between European countries where spin-offs are
performed have no significant effect on shareholder wealth. Again, this result is in line with that of
Veld and Veld-Merkoulova (2004) claiming that there is no difference in the announcement effect of
European spin-offs between countries with different corporate governance systems. Regression (8)
measures the relation between the relative size (REL_SIZE) of European spin-offs and the associated
shareholder wealth creation. The regression analysis shows that REL_SIZE has a positive coefficient
(0.21) which is statistically significant at the 1%-level. Regressions (9) and (10) measure the
importance of spin-off timing decisions on shareholder wealth effects. According to the results from
both regression analyses, the timing decision of an (European) spin-off during a cold market
(COLD_MRKT) or during a hot market (HOT_MRKT) is irrelevant since both coefficients are
statistically insignificant. Studies on European spin-offs as by Kirchmaier (2003) and by Veld and
Veld-Merkoulova (2004) did not investigate the timing effect as potential value channel in their
analyses. Furthermore, Desai and Jain (1999) did not find a significant association of timing on
shareholder wealth effects based on a sample of American spin-offs. The results of regressions (9) and
(10) are consistent with those of Desai and Jain (1999). Finally, regression (11) presents a high
Master Thesis Financial Management
Value creation from corporate restructuring
coefficient (5.79) for an existing takeover threat (TO_THREAT) prior to the spin-off announcement
on shareholder wealth effects. This coefficient is statistically significant at the 5%-level. The result is
in line with that of Boreiko and Murgia (2010) for European spin-offs. Again, Kirchmaier (2003) and
Veld and Veld-Merkoulova (2004) did not investigate a takeover threat prior to the announcement day
as potential value channel in their analyses.
In the case that independent variables are strongly correlated, then the multivariate regression results
and t-statistics might be biased due to multicollinearity (Nieuwenhuis, 2008). To detect for
multicollinearity, the correlations between each independent variables are computed using the
bivariate correlation option in SPSS. These results are presented in table 18.
Table 18 shows that the FOC_SIC variable is very modest correlated with other independent
variables. Strikingly, the correlation between FOC_SIC and FOC_REPORT is quite low. This seems
strange since both independent variables are a proxy for a change in corporate focus as affected by a
spin-off. A change in corporate focus measured by a change in SIC codes is a (academic) well
accepted proxy. Therefore, the low correlation between FOC_SIC and FOC_REPORT may imply that
using newspaper reports as proxy for a change in corporate focus is obviously ill-suited. Furthermore,
this might also explain why the results of a change in corporate focus on shareholder wealth effects are
not consistent with existing studies using newspaper reports in the cross-sectional test (table 10) and
using FOC_REPORT in the univariate regression analysis (table 17). The correlation matrix shows
also a high correlation between the independent variables: FC_ERROR, FC_STD and FC_NORM.
This is not surprising since these three variables are all proxies for the level of information asymmetry
prior to the spin-off. To prevent multicollinearity, only one of these three variables is included in the
multivariate regression analyses each time. Table 18 shows a quite high correlation between FC_STD
and the relative size (REL_SIZE) of the executed spin-offs. From a theoretical point of view, a high
correlation between these independent variables can be explained by the fact that when the level of
information asymmetry is high prior to a spin-off then the execution of a bigger spin-off is more
attractive to get rid on a larger part of the obscure activities. Moreover, table 18 also shows a relative
high correlation between the proxies for the level of information asymmetry and a takeover threat prior
to the spin-offs. This can be explained by a lot of uncertainty for shareholders during the period when
there is a takeover threat prior to the spin-off. This is in the sense that in times of a takeover threat
there are usually rumors about e.g. the number of bidders, kind of takeover or about the takeover
premium. As a consequence, forecast errors are more likely and hence the level of information
asymmetry is higher as well. The independent variables FOC_GEO and SHR_RIGHT have modest
correlations with other independent variables, therefore it will not affect multicollinearity. Finally, the
independent variables COLD_MRKT and HOT_MRKT are also modest correlated with other
independent variables.
61
Table 17
Table 18
Correlation matrix for independent variables
Independent
Variables
FOC_SIC
FOC_SIC
FOC_REPORT
FC_ERROR
FC_STD
FC_NORM
FOC_GEO
SHR_RIGHT
REL_SIZE
COLD_MRKT
HOT_MRKT
TO_THREAT
1
0.063
0.141
0.122
0.095
-0.014
0.205
0.223
-0.078
0.116
0.132
FOC_REPORT
0.063
1
0.101
0.031
-0.016
-0.059
0.091
-0.102
0.174
0.030
0.091
FC_ERROR
0.141
0.101
1
0.731
0.721
0.046
0.098
0.295
-0.096
0.039
0.516
FC_STD
0.122
0.031
0.731
1
0.582
-0.056
0.234
0.610
0.115
-0.159
0.462
FC_NORM
0.095
-0.016
0.721
0.582
1
-0.101
0.064
0.356
-0.054
0.102
0.330
FOC_GEO
-0.014
-0.059
0.046
-0.056
-0.101
1
-0.083
0.014
-0.040
-0.007
0.014
SHR_RIGHT
0.205
0.091
0.098
0.234
0.064
-0.083
1
0.265
-0.069
-0.041
0.079
REL_SIZE
0.223
-0.102
0.295
0.610
0.356
0.014
0.265
1
0.121
0.087
0.487
COLD_MRKT
-0.078
0.174
-0.096
0.115
-0.054
-0.040
-0.069
0.121
1
-0.323
0.078
HOT_MRKT
0.116
0.030
0.039
-0.159
0.102
-0.007
-0.041
0.087
-0.323
1
-0.061
TO_THREAT
0.132
0.091
0.516
0.462
0.330
0.014
0.079
0.487
0.078
-0.061
1
This table presents the correlation matrix for all independent variables used in the regression analyses. The correlations are calculated using the bivariate correlation option in SPSS.
FOC_SIC is a dummy variable with value 1 if the parent firm and the off-spring firm have a different two-digit SIC code and is 0 otherwise. FOC_REPORT is a dummy variable that
takes the value 1 if a newspaper reports corporate refocusing or related words, otherwise it is 0. FC_ERROR is the absolute earnings forecast error as explained before. FC_STD is the
standard deviation of earnings forecasts. FC_NORM is the normalized forecast error. FOC_GEO is a dummy variable with value 1 if a foreign subsidiary is spun-off and 0 if a domestic
subsidiary is spun-off. SHR_RIGHT is the La Porta et al. (1998) shareholder right index that ranges from zero to seven. REL_SIZE is a ratio of the assets that are spun-off over the total
assets of the parent firm prior to the spin-off transaction. COLD_MRKT is a dummy variable with value 1 if the spin-off announcement took place in times of low market indices,
otherwise 0. HOT_MRKT is a dummy variable that takes value 1 if the spin-off took place in times of high market indices and takes 0 otherwise. Finally, TO_THREAT is a dummy
variable with value 1 if there was a takeover threat twelve months preceding to the spin-off announcement and zero otherwise.
Table 19
Multivariate regression results of short-run cumulative abnormal returns for (completed) spin-offs.
Variables
Intercept
Exp. sign
FOC_SIC
+
FOC_REPORT
+
FC_ERROR
+
FC_STD
+
FC_NORM
+
FOC_GEO
+/-
SHR_RIGHT
=
REL_SIZE
+
COLD_MRKT
=
HOT_MRKT
=
TO_THREAT
+
COLD_MRKT * TO_THREAT
=
HOT_MRKT * TO_THREAT
=
SHR_RIGHT * FC_NORM
=
R-Square
Adj. R-Square
F-statistic
Sig.
(1)
-5.73**
(-2.13)
5.56**
(1.90)
(2)
-5.29*
(-1.78)
2.55*
(1.88)
-0.88
(-0.36)
(3)
-2.78
(-0.78)
6.61**
(2.19)
(4)
-3.71
(-0.93)
5.23*
(1.67)
(5)
-4.58
(-1.16)
5.96*
(1.77)
(6)
-7.38*
(1.81)
7.52**
(2.24)
(7)
-4.50
(-1.09)
5.98*
(1.75)
4.16**
(2.50)
3.35
(0.70)
-1.18
(-1.20)
0.16***
(2.67)
4.78***
(2.92)
3.07
(0.66)
-0.99
(-1.04)
0.13**
(2.10)
3.21
(0.25)
4.16**
(2.47)
3.42
(0.69)
-1.12
(-1.19)
0.16***
(2.64)
(8)
-0.51
(-0.16)
5.11**
(2.02)
(9)
-2.07
(-0.95)
4.64*
(1.89)
(10)
-1.28
(-0.58)
5.50**
(2.24)
(11)
-2.85
(-0.83)
3.53
(1.49)
2.46**
(2.24)
0.19***
(3.56)
0.19***
(3.48)
2.40
(0.57)
-1.23
(-1.34)
0.20***
(3.76)
1.69
(0.35)
-1.11
(-1.10)
0.18***
(2.97)
3.39
(1.44)
-0.15
(-0.04)
-4.33
(-0.59)
0.37
(0.42)
-0.90
(-0.28)
-0.25
(-0.08)
2.56
(1.08)
5.40**
(2.19)
3.93
(1.46)
6.76**
(2.37)
3.30
(1.18)
7.32
(1.26)
-5.30
(-0.97)
0.270
0.243
10.15
0.000
0.271
0.231
6.702
0.001
0.299
0.246
5.664
0.001
0.360
0.285
4.828
0.001
0.376
0.303
5.172
0.001
0.378
0.309
5.181
0.001
0.376
0.286
4.712
0.001
0.121
0.069
2.331
0.049
0.126
0.086
3.113
0.019
0.123
0.082
3.016
0.022
-0.14
(-0.23)
0.144
0.095
2.934
0.027
Table 19 (continued)
Multivariate regression results of short-run cumulative abnormal returns for (completed) spin-offs.
This table includes the regression coefficients for the three-day cumulative average abnormal returns for only 91 (completed) spin-off announcements by European firms from
January 1998 to December 2007. FOC_SIC is a dummy variable with value 1 if the parent firm and the off-spring firm have a different two-digit SIC code and is 0 otherwise.
FOC_REPORT is a dummy variable that takes the value 1 if a newspaper reports corporate refocusing or related words, otherwise it is 0. FC_ERROR is the absolute earnings
forecast error as explained before. FC_STD is the standard deviation of earnings forecasts. FC_NORM is the normalized forecast error. FOC_GEO is a dummy variable with value
1 if a foreign subsidiary is spun-off and 0 if a domestic subsidiary is spun-off. SHR_RIGHT is the La Porta et al. (1998) shareholder right index that ranges from zero to seven.
REL_SIZE is a ratio of the assets that are spun-off over the total assets of the parent firm prior to the spin-off transaction. COLD_MRKT is a dummy variable with value 1 if the
spin-off announcement took place in times of low market indices, otherwise 0. HOT_MRKT is a dummy variable that takes value 1 if the spin-off took place in times of high
market indices and takes 0 otherwise. TO_THREAT is a dummy variable with value 1 if there was a takeover threat twelve months preceding to the spin-off announcement and
zero otherwise. COLD_MRKT*TO_THREAT, HOT_MRKT*TO_THREAT and SHR_RIGHT*FC_NORM are interaction terms. The 1%, 5% and 10% statistical significance are
represented using asterisks ***, **, * respectively.
Master Thesis Financial Management
Value creation from corporate restructuring
However, the correlation (-0.323) between the two timing variables is relatively high. The sign (-) and
magnitude of this correlation are not surprising since if a spin-off is exercised during a hot market then
it is by definition not exercised in a moderate or cold market and vice versa.
In table 19, the multivariate regression results are presented for the cumulative average abnormal
returns of the 91 completed spin-offs over the three-day interval. The first regression in table 19 shows
that an increase in corporate focus has a positive coefficient (5.56) and is statistically significant at the
5%-level. This result is strongly in line with the earlier reported results from the cross-sectional test
(table 10) and the univariate regression analysis (table 17). The relative size variable is also included
in the first regression and has a positive coefficient (0.19), which is significant at the 1%-level. The
first regression model presents a relatively high R-square statistic (0.27). Hence, 27% of the variance
in the CAR[-1, +1] variable can be explained by the FOC_SIC and REL_SIZE variables.
The second regression model includes another variable as proxy for an increase in corporate
focus (FOC_REPORT). According to table 19, this coefficient (-0.88) has even a contrary sign (-) than
expected but is statistically insignificant. As mentioned before, the validity of this variable is
questionable since it has a strikingly low correlation with the FOC_SIC variable (table 18). Moreover,
the results from the cross-sectional analysis (table 10) and from the univariate regression analysis
(table 17) based on the FOC_REPORT variable are not in line with recent academic literature. The
results from the multivariate regression analysis confirm this statement.
The third regression shows that the coefficient (2.40) of an improvement in geographical focus
(FOC_GEO) has a very small T-statistic (0.57). As mentioned before, this can be explained by the fact
that the positive effects on an improvement of geographical focus are canceled out by the negative
effects. Regression (3) includes also a measure for shareholder rights (SHR_RIGHT). This variable
does not show the expected positive coefficient as based on the findings by Rossi and Volpin (2004).
Instead, the variable has a negative coefficient (-1.23) and it has a low T-statistic as well (-1.34).
Regression (4) adds the absolute earnings forecast error variable (FC_ERROR) to measure the
impact of the level of information asymmetry prior to the spin-offs on shareholder wealth effects. The
regression shows a positive coefficient (2.46), which is significant at the 5%-level. This result is in
line with the findings by Krishnaswami and Subramaniam (1999) and is contrary to Veld and VeldMerkoulova (2004).
Regression (5) replaces the variable FC_ERROR into FC_NORM to measure the impact of
the level of information asymmetry on shareholder wealth effects based on the normalized forecast
error. The coefficient is positive (4.16) and statistically significant at the 5%-level. This confirms the
importance of the level of information asymmetry before the spin-offs on shareholder wealth effects.
Moreover, the model explains a relatively high proportion (37.6%) of the variance in the CAR[-1, +1]
variable.
Master Thesis Financial Management
Value creation from corporate restructuring
Regressions (6) and (7) include the variables COLD_MRKT and HOT_MRKT respectively.
The timing effect of a spin-off seems to be mainly irrelevant since both variables are statistically
insignificant. These results are consistent to the findings by Boreiko and Murgia (2010) based on a
sample of European spin-offs.
Regression (8) measures the impact of a takeover threat (TO_THREAT) prior to the spin-offs
on shareholder wealth effects. To prevent multicollinearity, the relative size (REL_SIZE) variable is
removed from the model. The coefficient (5.40) has a positive sign and is statistically significant at the
5%-level. It can be concluded that a takeover threat prior to a spin-off plays an important role in
explaining shareholder wealth effects.
Accordingly, regressions (9) and (10) investigate whether the magnitude of this effect will be
higher if the takeover threat prior to a spin-off takes place in a cold or hot market. Table 19 shows that
the interaction term TO_THREAT * COLD_MRKT is highly positive (7.32) but not statistically
significant. This implies that a cold market circumstance will not serve as moderator in explaining
shareholder wealth effects. Regression (9) shows that there is also not such kind of interaction in the
case of a hot market.
Finally, regression (11) investigates whether better protected shareholders will benefit more or
less from a spin-off transaction when the level of information asymmetry prior to the spin-off is
higher. Weak protected shareholders face two forms of uncertainty in this case compared to well
protected shareholders. First, as it is by definition, weak protected shareholders may lose more (or at
least the same) shareholder power after a spin-off than well protected shareholders. Secondly, if there
is more information asymmetry prior to the spin-off transaction, then poor protected shareholders have
to face more uncertainty about their positions after the spin-off transaction. Table 19 does not show
the expected positive coefficient for the SHR_RIGHT * FC_NORM variable. However, the coefficient
is not statistically significant.
6.3 Long-run abnormal returns
Table 20 presents the long-run abnormal returns of the parent firms, off-spring firms and the proforma combined firms. The results are categorized in panel A, B and C respectively. The long-run
abnormal returns are defined as the buy-and-hold returns of the sample firms minus the buy-and-hold
returns of the matching firms. Matching firms are selected using a peer analysis in the Amadeus
database, mainly based on aspects as firm size and market-to-book ratios. For each panel, the equalweighted returns as well as the market-weighted returns are calculated. As described in section 5.3.2,
there is a discussion in the literature about the use of equal-weighted returns versus value weighted
returns. Value-weighted returns can be interpreted as the accumulation of the value effects for the
market as a whole (see e.g. Fama, 1998) and equal-weighted returns as the wealth effects of a random
spin-off event. To compare the long-run abnormal returns of this thesis with existing literature, both
kinds of returns are computed. Accordingly, the equal-weighted returns are determined as the average
66
Master Thesis Financial Management
Value creation from corporate restructuring
abnormal returns for the whole sample. The value weighted returns are calculated as the abnormal
returns weighted by the market value of equity at he execution date of the spin-offs. The sample size in
the long-run analysis is reduced from 91 to 52 for parent firms and even to 25 for off-spring firms and
pro-forma combined firms. This is caused by a limited number of (well-defined) matching firms in
Amadeus or due to missing share prices and market capitalization data in Thomson Financial
DataStream.
Table 20
Long-run abnormal returns of parent, off-spring and pro-forma combined firms.
Equal-weighted
Buy-and-hold period
Mean (%)
T-statistic
A. All parent firms (N=52)
Tsp to Tsp + 6
1.88
0.33
Tsp to Tsp + 12
8.16
0.93
Tsp to Tsp + 18
6.52
0.82
Tsp to Tsp + 24
8.09
0.88
B. All off-spring firms (N=25)
Tsp to Tsp + 6
0.66
Tsp to Tsp + 12
-11.32
Tsp to Tsp + 18
-20.87
Tsp to Tsp + 24
-6.14
0.12
-0.87
-0.86
-0.25
Value-weighted
Mean (%)
T-statistic
%-Positive
11.66
17.18
20.32
12.93
1.08
1.33
1.52
0.96
53.85
53.85
63.46
61.54
-2.82
-26.05
-24.70
-26.68
0.64
1.27
0.68
0.57
40.00
44.00
40.00
44.00
C. All pro-forma combined firms (N=25)
Tsp to Tsp + 6
1.16
0.19
10.42
1.07
64.00
Tsp to Tsp + 12
4.89
0.61
7.38
1.63
60.00
Tsp to Tsp + 18
3.63
0.18
8.61
1.43
56.00
Tsp to Tsp + 24
5.44
0.22
4.37
0.27
60.00
This table shows the long-run abnormal returns for European spin-offs completed from January 1998 to
December 2007. The long-run abnormal returns are defined as the buy-and-hold returns of the sample firms
minus the buy-and-hold returns of the matching firms. Matching firms are selected using a peer analysis in the
Amadeus database. The pro-forma combined firms are created by weighting the return of the parent and that of
the subsidiary by the market value of equity at the execution date of the spin-off. The equal-weighted returns are
computed as the average abnormal returns for the whole sample. The value weighted returns are computed as the
abnormal returns weighted by the market value of equity at the execution date of the spin-offs. The T-statistics
are calculated according to the method as described in section 5.3.2. Tsp is an abbreviation for the spin-off
execution date. Tsp + 6 (12, 18, 24) stands for the period of 6, 12, 18 and 24 months after the spin-off execution.
In panel A, the long-run abnormal returns for the parent firms are presented. The mean returns are
positive for the periods of 6 months until 24 months after the spin-off is executed. As expected, there
is a clear difference in magnitude between the equal-weighted returns and the value-weighted returns.
This indicates that big firms (in terms of the equity market value) in the sample are involved with
highly positive long-run abnormal returns. However, all returns are statistically insignificant. The
results of panel A differ from existing literature that were published based on American spin-offs. For
instance, Desai and Jain (1999) find significantly positive long-run abnormal returns in the 3-year
period after the spin-off is executed. Nevertheless, Veld and Veld-Merkoulova (2004) and Kirchmaier
(2003) find results for European spin-offs which are consistent to the findings in panel A.
67
Master Thesis Financial Management
Value creation from corporate restructuring
Panel B shows the results for the off-spring firms. Both the equal-weighted returns and the
value-weighted returns are negative (with exception of the equal-weighted return for the period of 6
months after the spin-off execution). The negative sign implies that shareholders of off-spring firms
will be involved with negative wealth effects in the years after the spin-off is executed. However, the
results are not statistically significant. Again, these results are not consistent with previous studies
regarding American spin-offs. Desai and Jain (1999) find positive abnormal returns for off-spring
firms, all significant at the 1%-level. Nevertheless, Veld and Veld-Merkoulova (2004) claim only
insignificant mean excess returns for European spin-offs.
Panel C presents the results for the pro-forma combined firms. As explained before, a spin-off
transaction involves a pro-rata distribution of the shares belonging to the off-spring firm to the
shareholders of the parent firm. Therefore, it is possible to calculate the long-run abnormal returns for
pro-forma combined firms by weighting the return of the parent firm and accompanying off-spring
firm by the market value of equity at the execution date of the spin-off. Panel C shows that
shareholders who held their shares in both the parent firm and the off-spring firm would have benefit
from positive long-run abnormal returns. Nevertheless, all returns are not statistically significant.
A quick look at the returns in panels A, B and C reveals that there is definitely no statistically
significant long-run shareholder wealth effect in the years after the execution of the spin-offs.
Brav (2000) states in his paper that researchers should be careful to interpret the significance of longrun abnormal returns as an indication about the level of market efficiency. This statement is based on
the fact the use of equal-weighted returns and value-weighted returns may lead to different
conclusions. Based on the findings of table 20 where the equal-weighted returns and value-weighted
returns are statistically insignificant, it indicates that European markets seem to be strongly efficient.
6.4 Analysis of long-run value effects
In the previous section, analyses on the relation between the short-run abnormal returns and the
underlying variables were performed. These analyses reveal that some variables play an important role
in shareholder wealth creation in the short-run were other variables seem to be irrelevant. However,
irrelevant variables in the short-run will not exclude any importance on shareholder wealth creation in
the long-run. Therefore, the relation between long-run abnormal returns of the parent firms and their
underlying variables is examined. Table 21 presents the results of the multivariate regression analysis
based on the parent firm’s one –and two year(s) abnormal returns.
The coefficient of the corporate focus variable is negative for both buy-and-hold periods.
According to the theory, the sign should be rather positive. Nevertheless, the T-statistics in both
regressions are low. This result is not consistent with studies regarding American spin-offs. For
instance, Cusatis et al. (1993) find that focus-increasing American spin-offs perform substantially
better than non-focus-increasing spin-offs one –and two year(s) after the spin-off is executed. On the
other hand, studies based on European spin-offs as by Veld and Veld-Merkoulova (2004) and
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Value creation from corporate restructuring
Kirchmaier (2003) claim the same conclusions as table 21, namely that corporate focus coefficient is
not statistically significant in the long-run analyses.
The third row in table 21 shows that the coefficient of information asymmetry prior to the
spin-off (FC_NORM) is highly positive in both regression analyses. However, the T-statistics are
quite low. Therefore, these results support the findings by Krishnaswami and Subramaniam (1999)
that firms with higher information asymmetry prior to the spin-off do not display better long-run
abnormal returns.
Table 21
Multivariate regression results of long-run abnormal returns: parent firms.
Variable
Intercept
Tsp to Tsp + 12
***23.45***
*** (0.87) **
Tsp to Tsp + 24
**32.55
** (1.08)
**
FOC_SIC
***-29.33***
*** (-1.19) **
**-37.89
** (-1.37)
FC_NORM
***13.95***
*** (0.94) **
**11.31
** (0.73)
FOC_GEO
***-54.45***
*** (-2.66) **
**-39.02*
** (-1.70)
SHR_RIGHT
***-4.40***
*** (-0.68) ***
REL_SIZE
***-9.51***
*** (-0.18) ***
HOT_MRKT
***8.43***
*** (0.39) ***
*
**
**-4.84
** (-0.67)
*
**12.87
** (0.22)
*
**14.02
** (0.58)
*
TO_THREAT
***-28.77***
*** (-1.01) ***
**-15.68
** (-0.49)
Number of observations
***52
**52
2
R
***0.397***
**0.243
Adjusted R2
***0.175***
**0.035
This table includes the regression coefficients for the one –and two-year abnormal returns for 52 European firms
that executed spin-offs from January 1998 to December 2007. FOC_SIC is a dummy variable with value 1 if the
parent firm and the off-spring firm have a different two-digit SIC code and is 0 otherwise. FC_NORM is the
normalized forecast error. FOC_GEO is a dummy variable with value 1 if a foreign subsidiary is spun-off and 0
if a domestic subsidiary is spun-off. SHR_RIGHT is the La Porta et al. (1998) shareholder right index that
ranges from zero to seven. REL_SIZE is a ratio of the assets that are spun-off over the total assets of the parent
firm prior to the spin-off transaction. HOT_MRKT is a dummy variable that takes value 1 if the spin-off took
place in times of high market indices and takes 0 otherwise. TO_THREAT is a dummy variable with value 1 if
there was a takeover threat twelve months preceding to the spin-off announcement and zero otherwise. Tstatistics are in parentheses. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **,
* respectively.
Table 21 presents highly negative coefficients for geographical-improved spin-offs in both analyses.
The coefficient is statistically significant at the 1%-level in the first analysis and significant at the
10%-level in the second analysis. Despite the magnitude of the coefficients is slightly higher in both
analyses compared to the findings by Veld and Veld-Merkoulova (2004), the conclusion is the same,
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Value creation from corporate restructuring
namely that geographical-improved spin-offs will demolish shareholder wealth in the long-run. As
discussed in their paper, Veld and Veld-Merkoulova (2004) claim that the negative coefficient for
geographical-improved spin-offs can be explained by negative earnings surprises. For instance, the
parent firm will be confronted with reduced economies of scale which is more disadvantageously
when main competitors operate internationally on large scale.
The fifth row in table 21 shows negative coefficients for shareholder rights (SHR_RIGHT) in
both regression analyses. Veld and Veld-Merkoulova (2004) argues that a negative coefficient for
shareholder rights in a long-run analysis can be explained by the fact that firms that execute spin-offs
also continue to maintain their shareholder-oriented policy in the long-run. Nevertheless, the
coefficients in both regression analyses are not statistically significant.
The coefficient for size (REL_SIZE) is negative in the one-year regression analysis and
positive in the two-year regression analysis. Both coefficients have quite low T-statistics. This can be
explained by the fact that shareholders are well able to incorporate all relevant information related to
the relative size of the spin-off into the share price at the time of announcement. Therefore, an
eventual (positive) long-run wealth effect affected by relative size should be rather a result of chance
than of causality38.
The timing coefficient (HOT_MRKT) is positive in both regression analyses. However, the Tstatistics show that the coefficients are not statistically significant. This finding contradicts the theory
by Tehranian et al. (1987) claiming that timing is really important, as it ensures a good start for the
off-spring firm’s stock after being listed and especially when the firm is willing to issue equity in the
near future. Hence, the timing of a spin-off seems to be irrelevant in the short-run (table 19) as well as
in the long-run (table 21).
Finally, the coefficients for a takeover threat prior to the spin-off (TO_THREAT) are negative
in both regression analyses. As explained in section 2.3.9, a takeover threat prior to the spin-off
provokes some pressure on managers to perform, otherwise their firm can be taken over and they
should be dismissed in all likelihood (Jensen and Ruback, 1983). However, this conclusion is too
premature in a long-run perspective since the coefficients are not statistically significant.
6.5 Changes in operating performance
This section describes the long-run results of changes in operating performance for parent firms after
spin-offs are performed. As explained in section 3.3, empirical research on the change in operating
performance after a spin-off is undertaken has obtained very little academic attention. Nevertheless,
operating performance in terms of return on assets (ROA) is often linked to compensation packages.
Therefore, it is important to obtain more insights about the changes in operating performance affected
by corporate restructuring, or more specifically, by corporate spin-off transactions.
38
causality is the relationship between an event (the cause) and a second event (the effect) where the second
event is a consequence of the first.
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Value creation from corporate restructuring
Table 22 presents the industry adjusted changes in operating performance for parent firms in
the one –and two year period after the spin-off is executed. The sample consists of 91 completed spinoffs in the ten years period from January 1998 to December 2007. Firm-specific return on assets are
collected using the Amadeus database. Industry-specific return on assets are retrieved from Thomson
Financial DataStream. Panel A displays the change in operating performance for the total sample size.
Accordingly, the total sample is divided into two subsamples: (1) focus-increasing spin-offs only and
(2) non-focus-increasing spin-offs only. A focus-increasing spin-off is defined as a difference between
the two-digit SIC code of the parent firm and that of the off-spring firm, otherwise it is a non-focusincreasing spin-off.
Table 22
Changes in operating performance after the spin-off date: parent firms.
Relative year [from, to]
Mean (%)
A. Total sample size (N=91)
2.20**
∆ ROA [0, +1]
2.94*
∆ ROA [0, +2]
T-statistic
%-positive
2.13
1.73
52.75
54.95
B. Focus-increasing spin-offs only (N=68)
∆ ROA [0, +1]
∆ ROA [0, +2]
2.74***
3.45**
3.24
2.58
56.83
58.12
C. Non-focus-increasing spin-offs only (N=23)
∆ ROA [0, +1]
∆ ROA [0, +2]
0.61
1.44
0.17
0.39
51.05
53.56
This table presents the industry adjusted change in operating performance for parent firms in the one -and two
year period after the spin-off is executed. Firm-specific return on assets (ROA) are collected using the Amadeus
database. Industry-specific are retrieved from Thomson Financial DataStream. A focus-increasing spin-off is
defined as a difference between the two-digit SIC code of the parent firm and that of the off-spring firm;
otherwise it is a non-focus-increasing spin-off. T-statistics are calculated based on formula (15) as described in
section 5.3.3. The 1%, 5% and 10% statistical significance are represented using asterisks ***, **, *
respectively.
Panel A of table 22 shows an improvement of the return on assets (ROA) ratio with a magnitude of
+2.20% one year after the execution of the spin-off. This figure is statistically significant at the 5%level. The change in return on assets increases even to 2.94% two years after the spin-off is completed
and is statistically significant at the 10%-level.
Panel B presents the results of changes in operating performance for focus-increasing spin-offs
only. The mean change in return on assets is 2.74% one year after the spin-off is undertaken. This
figure is statistically significant at the 1%-level. Two years after the reorganization, the return on
assets is increased to 3.45% and is statistically significant at the 5%-level.
Panel C presents the changes in return on assets for the non-focus-increasing spin-offs sample.
The one –and two year’s period change in return on assets for this subsample is 0.61% and 1.44%
respectively. Both figures are not statistically significant.
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Value creation from corporate restructuring
The results are strongly in line with those of Daley et al. (1997). These authors claim an excess
return on assets of 3.4% two years after the spin-off transaction. This figure for American spin-offs is
quite closely to the findings in this thesis for European spin-offs (2.94%). Furthermore, the authors
find improvements in operating performance for focus-increasing spin-offs (4.30%) which is
significant at the 1%-level. Smaller changes were found for non-focus-increasing spin-offs (1.40%).
However, the latter is not statistically significant.
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7. Discussion and conclusions
This thesis investigates shareholder wealth effects and value channels of European spin-offs over the
period 1998-2007. In section 4, ten hypotheses have been developed to enclose an answer to the next
dual research question: Do European corporate spin-offs create shareholder wealth and through
which channels is this wealth created? In section 7.1, the empirical results from section 6 will be used
to discuss the developed hypotheses and to formulate an answer to the main research question of this
thesis. Subsequently, section 7.2 describes the limitations of this study and presents suggestions for
further research. Finally, section 7.3 contains words of thanks to extend sincere gratitude to all those
who provided valuable recommendations during the writing process of this thesis.
7.1 Interpretation of the results
The implications of European spin-off announcements on short-run shareholder wealth effects were
examined using an event-study based on an ordinary least squares (OLS) market model. Table 9 shows
that the cumulative abnormal returns are positive with a magnitude of 2.90% for the entire sample for
the event window from one day prior to the announcement to one day after the announcement. This
figure is statistically significant at the 1%-level. Hence, hypothesis (H1) is not rejected.
Hence: European spin-offs will result in positive abnormal returns to the shareholders of the
parent firm in the short-run.
The long-run shareholder wealth effects were examined by calculating buy-and-hold abnormal returns
based on the matching firm approach. Table 20 (see section 6.3) shows positive abnormal returns for
parent firms within two years after the spin-off transaction. On the other hand, shareholders of offspring firms are generally involved with negative wealth effects two years after the spin-off is
executed. Pro-forma combined firms are associated with positive abnormal returns. However, the
results are not statistically significant for all three subgroups. Therefore, hypothesis (H2) is not
rejected.
Hence: Long-run abnormal returns following European spin-offs will not be significantly
different from zero.
Section 6.5 described the long-run results of changes in operating performance for parent firms after
spin-offs are performed. The results show an improvement of return on assets (ROA) with a
magnitude of +2.20% one year after the spin-off is executed. This figure is statistically significant at
the 5%-level. In the period of two years after the spin-off is executed, the operating performance is
even increased to 2.94%, which is significant at the 10%-level. So generally, the third hypothesis (H3)
is not rejected. Additionally, table 22 also shows changes in operating performance for (1) focusincreasing spin-offs and (2) non-focus-increasing spin-offs. The results of the first subgroup (1) are
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Value creation from corporate restructuring
positive with magnitudes of 2.74% and 3.45% for the one –and two-year period after the spin-off is
executed, respectively. Both figures are statistically significant. However, the second subgroup (2)
shows only statistically insignificant figures for both the one –and two-year period.
Hence: The long-run operating performance of parent firms will be improved following
European spin-offs.
The first channel through which value might be created in European spin-offs is examined for focusincreasing spin-offs versus non-focus-increasing spin-offs. The results from the cross-sectional
analysis (table 10) show a clear outperformance in short-run abnormal returns for focus-increasing
spin-offs (4.73%) compared to non-focus-increasing spin-offs (-1.15%). The difference between the
two subgroups is 5.88%, which is statistically significant at the 1%-level. The univariate regression
analysis (table 17) presents a positive (5.83%) and significant coefficient for a change in corporate
focus as well. The results of the multivariate regression analysis (table 19) also strongly confirm the
hypothesis. Therefore, hypothesis (4) is not rejected.
Hence: Focus-increasing spin-offs will result in higher abnormal returns than non-focusincreasing spin-offs.
The second value channel in European spin-offs, namely the level of information asymmetry prior to
the spin-off transaction was examined using three proxies. The cross-sectional analysis (table 11)
measured for all proxies a substantial outperformance of spin-offs that were involved with high levels
of information asymmetry prior to the transaction. The differences between the two subsamples lie
around the 6%-8% and are statistically significant for all the three proxies. The univariate regression
analysis (table 17) presents the same results for all the three proxies. The coefficients remain even
positive and statistically significant after including additional determinants in the multivariate
regression analysis (table 19). Therefore, there is strong evidence that hypothesis (5) will not be
rejected.
Hence: High information asymmetry-reducing spin-offs will result in higher abnormal returns
than low information asymmetry-reducing spin-offs.
Accordingly, geographical-improved spin-offs and non-geographical-improved spin-offs were
examined. The cross-sectional analysis (table 12) shows that geographical-improved spin-offs are not
associated with short-run abnormal returns due to statistical insignificance. On the other hand, the
subsample of non-geographical-increased spin-offs has positive abnormal returns (3.29%), which is
statistically significance at the 1%-level. However, the difference between the two subgroups is not
statistically significant. The univariate regression analysis (table 17) presents a slightly positive
coefficient (0.03%) but is also not statistically significant. Moreover, the results of the multivariate
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Value creation from corporate restructuring
regression analyses are the same. Therefore, geographical improvement seems to play no role in the
short-run shareholder wealth effects. Hence, hypothesis (6) is not rejected.
Hence: Geographical-increasing spin-offs will not result in higher abnormal returns than nongeographical-increasing spin-offs.
The cross-sectional analysis (table 13) investigated the impact of differences in corporate governance
between Anglo-Saxon countries and Rhineland countries on shareholder wealth effects. This analysis
is based on the La Porta et al. (1998) index. The cross-sectional analysis shows that the difference in
short-run wealth effects affected by anomalies in corporate governance is not statistically significant.
The univariate regression analysis (table 17) presents even a surprised negative coefficient (-0.03%),
but is statistically insignificant. The shareholder protection coefficients in the multivariate regression
analyses (table 19) are statistically insignificant as well. Furthermore, corporate governance does also
not to play a role as moderator since the interaction term is statistically insignificant. Therefore,
hypothesis (7) is rejected.
Hence: Spin-offs executed in common law countries will not result in higher abnormal returns
than spin-offs executed in civil law countries.
The fifth investigated determinant through which value might be created in European spin-offs is the
relative size of the spin-off transaction. The cross-sectional analysis (table 14) turns out that big-sized
spin-offs are involved with substantial higher short-run abnormal returns than small-sized spin-offs.
The difference between these two subgroups is 7.41% and statistically significant at the 1%-level. The
univariate regression analysis (table 17) presents a positive shareholder wealth effect which is
significant at the 1%-level as well. After including several other determinants in the multivariate
regression analysis (table 19), the relative size coefficient remains highly positive and statistically
significant. Therefore, it can be concluded that the relative size of the spin-off transaction plays an
important role in explaining shareholder wealth effects. Hence, hypothesis (8) is not rejected.
Hence: Shareholder wealth effects are positively associated with the portion of assets that is
spun-off.
The timing effect of European spin-offs as potential value channel was investigated in the crosssectional analysis (table 15). Spin-off announcements during a hot market were involved with positive
short-run abnormal returns (3.98%), statistically significant at the 5%-level. However, the difference
(0.73%) between the two subsamples is not statistically significant. Strikingly, the univariate
regression analyses (table 17) show positive coefficients for both the hot –and cold market variables.
Nevertheless, both coefficients are not statistically significant. The multivariate regression analyses
(table 19) turn out that the timing effect is irrelevant since the hot –and cold market coefficients are
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Value creation from corporate restructuring
not statistically significant. Moreover, the multivariate regression analyses show that the timing of
spin-off transactions does not play any role in interaction with a takeover threat prior to the spin-off
announcement. Therefore, hypothesis (9) is not rejected.
Hence: Spin-offs performed in a hot market will not result in higher abnormal returns than
spin-offs performed in a cold market.
Finally, the last examined channel through which shareholder value might be explained is the presence
of a takeover threat prior to the spin-off announcement. The cross-sectional analysis (table 16)
presents an average cumulative abnormal return of 6.72% for firms facing a takeover threat prior to the
spin-off announcement. For firms without facing any takeover threat prior to the spin-off
announcement, the average abnormal return is substantially lower (1.57%). The difference between the
two subsamples is therefore 5.15%, which is statistically significant at the 5%-level. The univariate
regression analysis (table 17) confirms this result by showing a (significant) positive coefficient of
5.79%, statistically significant at the 5%-level as well. Running multivariate regression analyses (table
19) turns out that the presence of a takeover threat prior a spin-off announcement plays an important
role in explaining shareholder wealth effects since the TO_THREAT coefficients are highly positive
and statistically significant. Therefore, hypothesis (10) is not rejected.
Hence: Spin-offs facing a takeover threat prior to the announcement will result in higher
abnormal returns than spin-offs without such kind of indication.
Now that all hypotheses are discussed in this section, an answer to the main research question of this
thesis can be formulated. The aim of this thesis is to investigate the next dual research question: Do
European corporate spin-offs create shareholder wealth and through which channels is this wealth
created? This thesis presents positive and statistically significant cumulative abnormal returns of
2.90% over the time window of one day prior to the spin-off announcement until one day thereafter.
Hence, ‘yes’, European spin-offs create shareholder wealth in the short-run. As it turns out in this
thesis, the shareholder wealth effects are significantly related to an increase in corporate focus, a
reduction in information asymmetry, the relative size of the spin-off transaction and the presence of a
takeover threat prior to the spin-off is executed. Determinants like an improvement in geographical
focus, the impact of corporate governance and the timing effect of spin-offs seem to play no role in
explaining shareholder wealth effects in the short-run. The impact of corporate governance and the
timing effect of spin-off transactions as a moderator function in explaining shareholder wealth effects
are also not statistically significant. While the answer to the main research question is ‘yes’ for shortrun shareholder wealth effects, the results in this thesis show that shareholders are not (significantly)
better off in the long-run. The multivariate regression analysis (table 21) turns out that the most
important determinant in explaining (negative) long-run shareholder wealth effects is the improvement
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Value creation from corporate restructuring
in geographical focus. Where an improvement in geographical focus was irrelevant in explaining
short-run shareholder wealth effects, it plays an important role in explaining long-run shareholder
wealth effects. A possible explanation is the reduction of economies of scale in production or the firm
has put its business at a disadvantage position in the long-run compared to competitors who operate
internationally. Furthermore, this thesis concludes that the operating performance of the parent firms
in the one –and two year period after the spin-off transactions increase significantly. More specifically,
focus-increasing spin-offs face substantially higher improvements in operating performance relative to
non-focus-increasing spin-offs.
The first column of table 23 presents an overview of the results as presented in this section.
Additionally, the table also shows whether these results are consistent, mixed or not consistent with
existing European and American studies.
The first conclusion in this thesis that shareholders will face substantially wealth effects from
an announced spin-off is consistent with both European –and American existing literature. E.g. Veld
and Veld-Merkoulova (2004) and Kirchmaier (2003) claim relatively high positive (significant)
announcement effects for European spin-offs. Among other authors, Desai and Jain (1999) show also
positive abnormal returns for American spin-offs in the short-run.
A more interesting conclusion is the insignificant shareholder wealth effect in the long-run
after a spin-off is executed. The finding is consistent with existing European studies but in contrast
with American studies. As explained before, a possible explanation can be the difference in market
efficiency. In a (perfect) efficient market, all relevant information should be already incorporated in
the share prices at the time of announcement. Therefore, insignificant shareholder wealth effects in the
long-run for European spin-offs may indicate that European capital markets are quite efficiently.
The third conclusion that the long-run operating performance of parent firms will be improved
following a spin-off cannot be compared with existing European studies due to a lack of academic
research. Nevertheless, recent American studies provide mixed evidence on whether operating
performance will be improved after a spin-off transaction is completed. For instance, Woo et al.
(1992) claim no improvements in operating performance one –and two year(s) after the spin-off.
Furthermore, the authors did not find any impact of focus-increasing spin-offs on operating
performance for the parent firms. Contrary, the results in this thesis show a significant positive change
in operating performance in the years after the spin-offs are executed and a substantial outperformance
for focus-increasing spin-offs compared to non-focus-increasing spin-offs. These results are consistent
to the findings by Daley et al. (1997) for American spin-offs.
Table 23 presents that the conclusions with respect to an improvement in corporate focus,
improvement in geographical focus, the impact of corporate governance and the presence of a takeover
threat prior to a spin-off transaction are all consistent with existing European studies. For instance,
Veld and Veld-Merkoulova (2004) found evidence for these value determinants in explaining
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shareholder wealth effects. Boreiko and Murgia (2010) claim evidence of higher abnormal returns for
European spin-offs facing a takeover threat rather than for spin-offs without such kind of indication.
However, these conclusions for European spin-offs are not all consistent with recent American studies,
namely the mixed evidence for geographical improved American spin-offs. For instance, Kogut and
Kulatilaka (1994) claim that more geographical focused firms face lower cost for coordination and
monitoring. On the other hand, the parent firm will be confronted with reduced economies of scale
since the size of the remaining firm after a spin-off is substantially reduced.
Table 23
A comparison of the conclusions presented in this thesis with existing European and American studies.
Existing European studies
Existing American studies
Not
Not
Conclusions presented in this thesis
Consistent Mixed
Consistent Mixed
consistent
consistent
Spin-offs will result in positive abnormal returns to the
X
X
shareholders of the parent firm in the short-run.
Spin-offs will not result in positive abnormal returns to the
shareholders of the parent firm in the long-run.
X
The long-run operating performance of parent firms will be
improved following spin-offs.
------------ N.I. ------------
Focus-increasing spin-offs will result in higher abnormal
returns than non- focus-increasing spin-offs.
X
X
X
X
High information asymmetry-reducing spin-offs will result
in higher abnormal returns than low information asymmetryreducing spin-offs.
X
X
Geographical-increasing spin-offs will not result in higher
abnormal returns than non-geographical-increasing spinoffs.
X
X
Spin-offs executed in common law countries will result in
higher abnormal returns than spin-offs executed in civil law
countries.
X
------------ N.R. ------------
Shareholder wealth effects are positively associated with the
portion of assets that is spun-off.
X
X
Spin-offs performed in a hot market will not result in higher
abnormal returns than spin-offs performed in a cold market.
------------ N.I. ------------
X
Spin-offs facing a takeover threat prior to the
announcement will result in higher abnormal returns than
X
X
spin-offs without such kind of indication.
This table presents an overview of whether the conclusions as presented in this thesis are consistent, mixed or
not consistent with existing European and American studies. ‘X’ stands for the right comparison, ‘N.I.’ for Not
Investigated as is known to the best knowledge of the author, ‘N.R.’ for Not Relevant.
The result in this thesis that information-asymmetry-reducing spin-offs are involved with substantially
higher shareholder wealth effects than non-information-reducing spin-offs is not consistent with the
results by Veld and Veld-Merkoulova (2004) for European spin-offs. These authors did not find
evidence for a significant difference between the two subsamples. American studies (e.g.
Krishnaswami and Subramaniam, 1999) claim strong evidence that information asymmetry is an
important determinant in explaining shareholder wealth effects. Thus, the results in this thesis are
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more consistent with existing American studies and contradict the findings by Veld and VeldMerkoulova (2004) for European spin-offs.
As it was turn out in section 6.2, the timing of spin-offs seems to be irrelevant for shareholder
wealth effects. To the best knowledge, there are no studies available examining the timing effect of
European spin-offs on shareholder value. Nevertheless, American studies report mixed evidence. For
instance, Jung et al. (1996) claims that the timing of spin-offs is really important since existing
shareholders may benefit from a hot market at the expense of entering shareholders when the firm is
willing to issue shares nearly after a spin-off. On the other hand, a number of American studies (e.g.
Desai and Jain, 1999) does not find any significant association of timing on shareholder wealth effects.
7.2 Limitations and suggestions for further research
Due to a number of reasons it is inevitable to claim conclusions without any inaccuracies. First of all,
the writing process of this thesis embraces a relatively short time period of 4 months. This short time
period limited to verify all used data coming form databases as SDC Mergers and Acquisitions
Platinum, ZEPHYR, Amadeus, IBES and Thomson Financial DataStream. For instance, it was too
time consuming to collect all corporate annual reports to find the financial ratios needed for the
analyses. Instead, the data is used from the databases as enumerated before.
This thesis investigates the shareholder wealth effects of European spin-offs over 1998 to
2007. Initially, a more extended time period was preferred to use a bigger sample size. However, it is
quite difficult to find firm-specific financial data before 1998. Even databases like Amadeus and IBES
do not report these data. As a consequence, only spin-off transactions after 1997 were examined in this
thesis.
Another limitation of this study is the exclusion of two important potential value channels,
namely the wealth transfers from bondholders to shareholders and the implications of taxes on
shareholder wealth effects. The measurement of wealth transfers from bondholders to shareholders
requires the use of tradable corporate bonds. As a limitation, a large number of European firms use
non-tradable bank debt instead of corporate bonds. Therefore, it was not possible to examine this
potential value channel. Furthermore, it was also not possible to measure the impact of taxes on
shareholder wealth effects since in countries like France and Germany the taxation will only be taken
place after the spin-off date.
A huge limitation during the writing process of this thesis was the limited availability of
existing literature about European spin-offs. Only three European studies were found on this topic,
namely from Kirchmaier (2003), Veld and Veld-Merkoulova (2004) and from Boreiko and Murgia
(2010). The first author did not investigate potential value channels but only short –and long-run
shareholder wealth effects associated with announced and executed European spin-offs. On the other
hand, Veld and Veld-Merkoulova (2004) investigated shareholder wealth effects in the short –and
long-run as well as the potential value determinants. Nevertheless, the authors did not examine
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Value creation from corporate restructuring
changes in operating performance and they did not investigate several potential value determinants
such as the timing-effect of spin-off transactions and the presence of a takeover threat prior to the spinoff transaction. The most recent study on this topic is by Boreiko and Murgia (2010) which includes
the presence of a takeover threat variable into their analyses. However, that study investigates the
single impact of a takeover threat prior to a spin-off transaction without including other determinants.
As described before, the motivation of this paper is largely based on the literature shortcoming of
European studies on shareholder wealth effects associated with corporate spin-offs.
This thesis has provided some answers with respect to shareholder wealth effects and the
channels through which value might be created in European spin-offs. As pointed out before, a
number of conclusions in existing literature does not receive confirmation in this thesis. Thus, more
research is needed to obtain an one-sided opinion about these items in academic literature.
Furthermore, some suggestions for further research came up during the writing process of this thesis.
First, this thesis only includes (pure) spin-off transactions where there is a 100% distribution
of the shares to the shareholders of the parent firm. In this case, the off-spring firm becomes
independently and obtains its own corporate governance regime. However, (pure) spin-off transactions
are not always usual in the sense that many off-spring firm remains highly dependent to the parent
firm (corporate split-offs). As discussed in section 2.1, there is a difference in terminology between
corporate spin-offs and split-offs. A suggestion for further research is to investigate whether
shareholder wealth effects significantly differ between these two types of transactions. From a
theoretical point of view, lower shareholder wealth effects can be expected for parent firms since the
firm keeps spending its valuable corporate resources on (unrelated/unattractive) activities. On the other
hand, higher shareholder wealth effects can be expected for off-springs firms since they remain
financially backed by the parent firm which in essentially the position of existing shareholders insures.
Secondly, there are several corporate restructuring mechanisms such as spin-offs, sell-offs,
equity carve-outs and tracking stocks. Existing literature is commonly focused on shareholder wealth
effects of one of these restructuring mechanisms individually but rarely simultaneously. To obtain a
complete view of the differences in shareholder wealth effects, it can be suggested to execute a single
study incorporating several restructuring mechanisms over the same event period. The working paper
of Powers (2001) provides a good starting point on this topic by analyzing a sample of American spinoffs, sell-offs and equity carve-outs that occurred between 1981 and 1998.
Thirdly, one of the examined topics in this thesis is the change in operating performance in the
one –and two year period after a spin-off is executed. A suggestion for further research is to
investigate whether corporate spin-offs are associated with changes in CEO compensation. More
specifically, whether the changes in managerial incentive compensation can explain the value
improvement of the parent firm and the operating performance improvements that occur following
spin-offs, or whether it is the other way around. A recommended paper on this topic is that of Pyo
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Value creation from corporate restructuring
(2007) who analyzed a sample of 124 spin-offs during 1990 to 1997. The author claims that changes in
incentive compensation are a significant motive for spin-offs.
7.3 Acknowledgements
This master thesis is conducted under the auspices of the department Finance of Tilburg University. I
would like to use this opportunity to thank some people of the university and beyond.
First of all, my sincerest thanks and appreciation goes to my supervisor María Fabiana Penas
for her continuous support during the writing process of this thesis. Thank you so very much for your
advice, input and mentorship. Especially the advices with respect to the regression analyses were very
useful. Additional thanks to R. Grim, research data specialist at Tilburg University, for giving me
access to the IBES database and the WRDS portal. Without this support, it was e.g. not possible to
collect data with respect to analyst forecasts to measure the impact of information asymmetry on
shareholder wealth effects associated with European spin-offs. Furthermore, I would like to thank the
professors associated to the finance department of Tilburg University for all interesting lectures in the
last four years. I would like to thank all the people who read this thesis very carefully. Their critical
evaluations and recommendations have certainly given this thesis additional value.
My warmest thanks go to my family, especially to my parents, Jacques and José and to my
two brothers, Jelle and Sjoerd. It was certainly not easy for them to life with a brother who invested a
large part of this time in his study. Each day, after a 3.5-hour travel by train from Wijchen to Tilburg, I
came home in an environment with love. Thank you so very much.
Besides, I cannot forget my current employer Eiffel B.V. for offering me a great job as young
financial and the possibilities to follow the executive master of finance and control (RC) in the near
future. In this way, I can exploit my interests for finance and control related topics in the coming
years.
Thank you all for the support,
Jarl Zegers
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