Do spin-offs signal an effective restructuring strategy to shareholders? A global study on the short- and long-term performance of parent companies

Abstract

This large-scale study explores the use of spin-offs as a strategy for corporate restructuring and the determinants of short- and long-term performance of parent companies after the announcement of a spin-off. We analyze data on hundreds of companies in 47 countries, comprising 921 parent companies and 1101 new entities created from 1032 complete spin-offs over the period March 2001 to June 2020. Based on moderation and mediation analyses conducted via the bootstrapping technique with data for different event windows and fiscal years, we show that parent company performance, proxied by cumulative abnormal returns, buy-and-hold abnormal returns, the return on assets, and the return on equity, is significantly influenced by the market capitalization of the parent company and the value of the spin-off transactions (subject to several control variables). The econometric outcomes from numerous moderation and mediation models suggest that parent companies are better off when they strategically match the value of spin-off transactions with their own business model so that investors can perceive divestiture as a timely, profitable signal. In the long run, parent companies raise their financial performance, which shows that spin-offs can serve as effective tools for restructuring. Our study offers important insights for both large and small parent companies that are interested in spinning off business divisions and attracting attention from stock market investors while enhancing their financial performance.