Value creation from corporate restructuring

Value creation from corporate restructuring Wealth effects and value channels of European spin-offs over 1998-2007

Name: J.J.T.M. Zegers

ANR: 722085

E-mail: [email protected]

Supervisor: Dr. M.F. Penas

Date: 07-09-2010

Code: 390304

Department: Finance (FEB)

Master Thesis Financial Management Faculty of Economics and Business Administration, Tilburg University

Master Thesis Financial Management Value creation from corporate restructuring

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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 three-

day 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 non-

focus-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, big-

sized 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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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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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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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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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, spin-

offs 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 spin-

off 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 spin-

off 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 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 long-

run 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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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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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 short-

run 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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Figure 1: Structure of a spin-off.

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 spin-

offs 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 split-

off. Formally, a spin-off is a completed

execution all at once in a 100%

distribution to the shareholders of the

parent firm. On the other hand, in a

split-off the parent firm retains a

minority stake (often less than 20%) in

the off-spring firm and distributes the

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).

Off-

spring

Parent Parent Business

Unit

Shareholders Shareholders


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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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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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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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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.


15

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).


16

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). 8 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.


17

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.


18

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 By means of 8K and 10K statements or trading updates. 12

See Krishnaswami and Subramaniam (1999), Kim and Verrecchia (1997) and Hasbrouck (1991).


19

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.


20

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 See for instance Daley, Mehrotra and Sivakumar (1997). 15

They find no impact of shareholder rights on one-year excess returns.


21

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 spin-

off 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. 17 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.


22

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 spin-

off. 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 non-

tradable 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.


23

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 Veld-

Merkoulova (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.


24

Bidding firms are usually only interested in some activities of the target firm for a variety of

reasons21. 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 spin-

off 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.


25

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.

Author(s) Year Country Period N

Event

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


26

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-focus-

increasing 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 spin-

offs (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.


27

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 Period N Subject AR [T -to- T+12] AR [T -to- T+24]

Desai and Jain US 1975-1991 155 Combined +7.7% +12.7%

(1999) 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


28

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.


29

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 focus-

increasing 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 non-

focus-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 spin-

offs. Therefore, the aim of this thesis is to obtain more academic evidence on this topic.


30

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.


31

H4: Focus-increasing spin-offs will result in higher abnormal returns than non- focus-

increasing 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 non-

geographical-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.


32

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 spin-

offs 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 Veld-

Merkoulova (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.


33

Table 3

Summary of the hypotheses as treated in this thesis.

Testable item Expected relation Accompanying hypotheses

Short-run wealth effects + 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-geographical-


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.


34

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.


35

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.

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.

Year UK NL SW FR GE BE IT FI SP CH NO IR DE GR Total

1998 12 2 8 1 3 1 27

1999 6 4 4 2 2 2 1 2 2 25

2000 15 2 1 7 1 2 5 1 3 2 2 1 42

2001 7 5 1 1 1 1 1 2 19

2002 3 1 1 1 6

2003 3 2 1 2 1 3 1 1 1 15

2004 4 3 2 2 2 2 1 16

2005 6 1 4 1 4 1 3 2 1 1 1 2 27

2006 9 1 2 1 5 3 3 1 25

2007 9 2 4 1 2 1 6 25

= Total number of observations 74 13 33 6 28 7 17 10 2 11 15 5 2 4 227

-/- Multiple announcement 8 5 2 6 3 2 26

-/- no stock price data available 3 5 3 1 4 1 4 4 3 2 30

-/- parent not known 25 2 2 1 1 2 3 2 1 1 40

Total sample 38 6 23 4 21 6 5 7 2 4 8 4 2 1 131

Completed 33 3 20 3 5 4 3 5 1 3 7 3 0 1 91


36

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-spring-

firms. 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


37

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 off-

spring 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


38

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 off-

spring 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 Variables

Improvement of corporate focus 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


39

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.


40

T-200 days T-50 days T

Observation period

Event day

Event window

Estimation period

T-10 days T+10 days

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

case of an individual outlier in the dataset. The average abnormal returns (AR��t) for day t are computed

as follows:

AR��t = �

N ∑ AR�,N�� (3)


41

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) = ∑ AR�� t (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��

S�AR�� (5)

Where in this formula (N-1) is defined as the degrees of freedom and S(AR��t) is the sample standard

deviation error of the mean of stock returns during the estimation period [-200, -50]. The student T-

statistic for the cumulative abnormal returns is formulated as follows:

t(N-1) ~ CAR � ,��

S�AR�� √�� (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.


42

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 buy-

and-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)

Next, the average buy-and-hold abnormal returns (BHAR��) are determined for several periods. The used

equation is as follows:

BHAR�� (t1, T) =

�

N ∑ BN�� HARj, (t1, T) (10)

Where in equation 10 ‘N’ is the total sample size. To test the null hypothesis of zero average buy-and-

hold abnormal returns, the T-statistic proposed by Barber and Lyon (1997) is used. The T-statistic is

defined as follows:

t(N-1) ~ BHAR�� ,T�

S!BHAR�� ,T�"/√N (11)

31

Size is defined as the market value of equity in this case.


43

Where in equation 10, S!BHAR�� t�, T�" is the sample standard deviation error and (N-1) is defined as

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 spin-

offs 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.


44

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)

In formula (15), S(∆'()'��) is the standard error of the change in the industry adjusted returns on

assets.

34

ROA = profit margin x asset turnover


45

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


46

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.

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

-0,01

-0,005

0

0,005

0,01

0,015

0,02

0,025

0,03

-10 -8 -6 -4 -2 0 2 4 6 8 10

CAAR Entire Spin-off sample


47

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 Veld-

Merkoulova (2004) for European spin-offs.

Table 10

Cross-sectional tests for the improvement of corporate focus on short-run wealth effects.


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


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 focus-

increasing 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.


48

Figure 4: The development of short-run cumulative average abnormal returns for focus-increasing spin-

offs (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.



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


B. Based on the standard deviation of forecast.

High standard deviation of earnings forecast (20-top) 20 6.49*** 2.00 60.00

Low standard deviation of earnings forecast (20-bottom) 20 0.76*** 1.52 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



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.

-0,03

-0,02

-0,01

0

0,01

0,02

0,03

0,04

0,05

0,06

-10 -8 -6 -4 -2 0 2 4 6 8 10

Focus-increasing spin-offs Non-focus-increasing spin-offs


49

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 spin-

offs 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.


50

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.



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



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


-0,02

-0,01

0

0,01

0,02

0,03

0,04

0,05

0,06

0,07

0,08

0,09

-10 -8 -6 -4 -2 0 2 4 6 8 10

High information asymmetry on beforehand Low information asymmetry on beforehand


51

Figure 6 depicts the development of short-run cumulative average abnormal returns for geographical-

improved spin-offs and for non-geographical-improved spin-offs. It shows clearly that non-

geographical-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.

Figure 6: The development of short-run cumulative average abnormal returns for non-geographical-

improved 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.

-0,015

-0,01

-0,005

0

0,005

0,01

0,015

0,02

0,025

0,03

0,035

-10 -8 -6 -4 -2 0 2 4 6 8 10

Non-geographical-improved spin-offs Geographical-improved spin-offs


52

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.



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



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



53

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 spin-

offs 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.

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 off-

spring 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

-0,02

-0,01

0

0,01

0,02

0,03

0,04

0,05

-10 -8 -6 -4 -2 0 2 4 6 8 10

Low shareholder protection High shareholder protection


54

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.



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



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 Veld-

Merkoulova (2004) support the results of Schipper and Smith (1983) using a sample of European spin-

offs as well. The results in this thesis as presented in table 14 strongly support the latter one.

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 spin-

offs 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

-0,04

-0,02

0

0,02

0,04

0,06

0,08

0,1

-10 -8 -6 -4 -2 0 2 4 6 8 10

Big sized spin-offs Small sized spin-offs


55

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.



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 27 3.25*** 1.42 55.56

Announcements during a hot market 40 3.98*** 2.27 55.00



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


56

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.

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

-0,02

-0,01

0

0,01

0,02

0,03

0,04

0,05

0,06

-10 -8 -6 -4 -2 0 2 4 6 8 10

Spin-offs executed during hot markets Spin-offs executed during cold markets


57

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.



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



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 spin-

offs 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.


58

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 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 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).

-0,01

0

0,01

0,02

0,03

0,04

0,05

0,06

0,07

0,08

-10 -8 -6 -4 -2 0 2 4 6 8 10

Spin-offs involved with a takeover threat Spin-offs involved without a takeover threat

Table 17

Univariate 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. 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.

Variables Expected sign (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Intercept -0.35

(-0.17)

4.33***

(3.04)

0.58

(0.48)

-10.55***

(-2.94)

0.91

(0.69)

3.94***

(3.38)

4.03

(1.44)

-2.05

(-1.07)

3.67***

(2.95)

3.09**

(2.33)

2.41*

(1.91)

FOC_SIC + 5.83**

(2.37)

FOC_REPORT + -1.01

(-0.44)

FC_ERROR + 3.59***

(4.12)

FC_STD + 14.70***

(4.73)

FC_NORM + 3.08***

(3.02)

FOC_GEO +/- 0.03

(0.01)

SHR_RIGHT = -0.03

(-0.04)

REL_SIZE + 0.21***

(3.99)

COLD_MRKT = 1.35

(0.48)

HOT_MRKT = 2.87

(1.18)

TO_THREAT + 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


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


61

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.

Table 17

Table 18

Correlation matrix for independent variables

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.

Independent

Variables FOC_SIC FOC_REPORT FC_ERROR FC_STD FC_NORM FOC_GEO SHR_RIGHT REL_SIZE COLD_MRKT HOT_MRKT TO_THREAT

FOC_SIC 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

Table 19

Multivariate regression results of short-run cumulative abnormal returns for (completed) spin-offs.

Variables Exp. sign (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

Intercept -5.73**

(-2.13)

-5.29*

(-1.78)

-2.78

(-0.78)

-3.71

(-0.93)

-4.58

(-1.16)

-7.38*

(1.81)

-4.50

(-1.09)

-0.51

(-0.16)

-2.07

(-0.95)

-1.28

(-0.58)

-2.85

(-0.83)

FOC_SIC + 5.56**

(1.90)

2.55*

(1.88)

6.61**

(2.19)

5.23*

(1.67)

5.96*

(1.77)

7.52**

(2.24)

5.98*

(1.75)

5.11**

(2.02)

4.64*

(1.89)

5.50**

(2.24)

3.53

(1.49)

FOC_REPORT + -0.88

(-0.36)

FC_ERROR + 2.46**

(2.24)

FC_STD +

FC_NORM + 4.16**

(2.50)

4.78***

(2.92)

4.16**

(2.47)

3.39

(1.44)

FOC_GEO +/- 2.40

(0.57)

1.69

(0.35)

3.35

(0.70)

3.07

(0.66)

3.42

(0.69)

-0.15

(-0.04)

SHR_RIGHT = -1.23

(-1.34)

-1.11

(-1.10)

-1.18

(-1.20)

-0.99

(-1.04)

-1.12

(-1.19)

-4.33

(-0.59)

0.37

(0.42)

REL_SIZE + 0.19***

(3.56)

0.19***

(3.48)

0.20***

(3.76)

0.18***

(2.97)

0.16***

(2.67)

0.13**

(2.10)

0.16***

(2.64)

COLD_MRKT = 3.21

(0.25)

-0.90

(-0.28)

HOT_MRKT = -0.25

(-0.08)

2.56

(1.08)

3.93

(1.46)

TO_THREAT + 5.40**

(2.19)

6.76**

(2.37)

3.30

(1.18)

COLD_MRKT * TO_THREAT = 7.32

(1.26)

HOT_MRKT * TO_THREAT = -5.30

(-0.97)

SHR_RIGHT * FC_NORM = -0.14

(-0.23)

R-Square 0.270 0.271 0.299 0.360 0.376 0.378 0.376 0.121 0.126 0.123 0.144

Adj. R-Square 0.243 0.231 0.246 0.285 0.303 0.309 0.286 0.069 0.086 0.082 0.095

F-statistic 10.15 6.702 5.664 4.828 5.172 5.181 4.712 2.331 3.113 3.016 2.934

Sig. 0.000 0.001 0.001 0.001 0.001 0.001 0.001 0.049 0.019 0.022 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.


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 Veld-

Merkoulova (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.


66

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 pro-

forma 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 equal-

weighted 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


67

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 Value-weighted %-Positive

Buy-and-hold period Mean (%) T-statistic Mean (%) T-statistic

A. All parent firms (N=52)

Tsp to Tsp + 6 1.88 0.33 11.66 1.08 53.85

Tsp to Tsp + 12 8.16 0.93 17.18 1.33 53.85

Tsp to Tsp + 18 6.52 0.82 20.32 1.52 63.46

Tsp to Tsp + 24 8.09 0.88 12.93 0.96 61.54

B. All off-spring firms (N=25)

Tsp to Tsp + 6 0.66 0.12 -2.82 0.64 40.00

Tsp to Tsp + 12 -11.32 -0.87 -26.05 1.27 44.00

Tsp to Tsp + 18 -20.87 -0.86 -24.70 0.68 40.00

Tsp to Tsp + 24 -6.14 -0.25 -26.68 0.57 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.


68

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 long-

run 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


69

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 Tsp to Tsp + 12 Tsp to Tsp + 24

Intercept ***23.45***

*** (0.87) ** **

**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) *** *

**-4.84

** (-0.67)

REL_SIZE ***-9.51***

*** (-0.18) *** *

**12.87

** (0.22)

HOT_MRKT ***8.43***

*** (0.39) *** *

**14.02

** (0.58)

TO_THREAT

***-28.77***

*** (-1.01) ***

**-15.68

** (-0.49)

Number of observations ***52 **52

R2

Adjusted R2

***0.397***

***0.175***

**0.243

**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. T-

statistics 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,


70

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 T-

statistics 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.


71

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 spin-

offs 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-focus-

increasing spin-off.

Table 22

Changes in operating performance after the spin-off date: parent firms.

Relative year [from, to] Mean (%) T-statistic %-positive

A. Total sample size (N=91)

∆ ROA [0, +1] 2.20** 2.13 52.75

∆ ROA [0, +2] 2.94* 1.73 54.95

B. Focus-increasing spin-offs only (N=68)

∆ ROA [0, +1] 2.74*** 3.24 56.83

∆ ROA [0, +2] 3.45** 2.58 58.12

C. Non-focus-increasing spin-offs only (N=23)

∆ ROA [0, +1] 0.61 0.17 51.05

∆ ROA [0, +2] 1.44 0.39 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.


72

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.


73

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 off-

spring 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) focus-

increasing spin-offs and (2) non-focus-increasing spin-offs. The results of the first subgroup (1) are


74

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 focus-

increasing 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-focus-


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


75

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 non-

geographical-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 cross-

sectional 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


76

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 short-

run 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


77

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


78

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

Conclusions presented in this thesis Consistent Mixed Not

consistent Consistent Mixed

Not

consistent

Spin-offs will result in positive abnormal returns to the

shareholders of the parent firm in the short-run. X X

Spin-offs will not result in positive abnormal returns to the

shareholders of the parent firm in the long-run. X X

The long-run operating performance of parent firms will be

improved following spin-offs. ------------ N.I. ------------ X

Focus-increasing spin-offs will result in higher abnormal

returns than non- focus-increasing spin-offs. X X

High information asymmetry-reducing spin-offs will result

in higher abnormal returns than low information asymmetry-

reducing spin-offs.

X X

Geographical-increasing spin-offs will not result in higher

abnormal returns than non-geographical-increasing spin-

offs.

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

spin-offs without such kind of indication.

X X

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


79

more consistent with existing American studies and contradict the findings by Veld and Veld-

Merkoulova (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


80

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 spin-

off 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 spin-

offs, 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


81

(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


82

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Value creation from corporate restructuring