The More The Merrier? Does Board Size Matter For The
Value Created In A Spin-off?
Ludo Hoenderop Student Number: 10259732
Specialization: Finance Supervisor: Mr. M.A. Dijkstra
Abstract
This thesis investigates the relationship between the board size of the parent company and the value created in terms of cumulative abnormal returns through a spin-off. A sample of 93
companies located in the U.S in the period 2003-2013 is collected. An event study examines whether the board size of the parent company has a relationship with the value effect of the cumulative abnormal returns in time of a spin-off. A 10% positively significant relationship
Table of content
1. Introduction……… 3 2. Literature Review……….………..4 3. Research Methodology………...8 4. Data………....10 5. Regression Results ………12 6. Conclusion ………...17 References ………..19 Appendix………...201.Introduction
On the 30th of January 2008 it was announced that Altria, one of the world's
largest tobacco corporations, completed the spin-off of Philips Morris International Inc. The company began trading with a 100% initial public offering on the NYSE. The deal has been valued at 113,000 million dollars and is the largest spinoff of the last decade. The result of the spin-off is better shareholder value for both of the companies.
A corporate spin-off takes place when a company creates a subsidiary that holds a portion of its assets to create a new independent company. A spin-off decision should have a positive influence on the stock prices of the parent company and create value for the
shareholders (Miles, 1983). Several event studies have proved that spinning-off a part of the U.S Company is associated with a positive effect on the cumulative abnormal return of the parent company (Krihnaswami and Subramaniam, 1997; Schipper and Smith, 1983 and Hite and Owers, 1983). Board size has influence on the value created with a spin-off. Dalton, Daily, Johnson and Ellestrand (1998) suggest that larger boards bring together more specialists, more experience and more knowledge and in the end offer a better advice to create firm value. In opposite, Yermack (1996) founds that larger board size has a negative effect on the firm value.
The research question of this thesis is if board size of the parent company matters for the value that is created in a corporate spin-off. The sample that is used contains 93 parent companies located in the United States of America (USA) and are listed on the New York Stock Exchange. In this thesis the relationship between the board size and the cumulative abnormal returns in time of a spin-off is examined. The event windows of 1, 0], [0, +1], [-20, 0] and [0, +20] are used to analyze the short-term effect of the cumulative abnormal returns. The results of the thesis show there is a 10% significantly positive relationship between the board size of the parent company and the value created on cumulative abnormal returns through a spin-off decision.
The thesis is organized as follows. Chapter 2 describes the theoretical literature, discusses empirical evidence and formulates a literature conclusion. Chapter 3 describes the methodology. Chapter 4 describes the data sample. Chapter 5 analyzes the regression results of the cumulative abnormal returns in relation with the board size. Finally, chapter 6 contains the conclusion from the results.
A corporate spin-off takes place when a company creates a subsidiary that holds a portion of its assets to create a new independent company (Miles and Rosenfeld, 1983). The divested part becomes an independent firm that is listed separately on the stock market. The shares in the new company are delivered as stock dividend to shareholders in the parent company (Daley, Mehrotra & Sivakumar, 1997). When spinning-off a subsidiary there are no buyers and sellers for the shares. A spin-off involves no cash transactions.
An advantage of a spin-off is that it can be structured to a tax-free transaction. Section 355 of U.S corporate tax law describes that spinning-off a part of the company has U.S tax consequences and it allows movement of corporate entities without U.S tax. In order to spin-off tax free the parent company can distribute the stock to the new company if the distribution meets 3 criteria: The parent company must control at least 80% of the voting power of all the stocks and at least 80% of the non-voting stocks of the subsidiary. So, 80% of the
shareholders must be insider shareholders. Retention of the controlled stocks must be supported by with an approved business reason accepted by the shareholders and
management. The parent company must dispose the retained shares of the subsidiary within five years following the spin-off (Beller and Harwell, 2001).
After the spin-off there is the potential increasing for the future flexibility in the portfolio decisions that creates value for the shareholder. For example, the subsidiary has growth opportunities while the parent is capable of offering a high dividend yield. A spin-off allows the shareholders preferring capital gains to hold shares in the subsidiary, while those
preferring dividends can retain the parents’ shares (Miles and Rosenfeld, 1983). A spin-off would allow the parent and subsidiary to specialize their contracts. When the gains in the contracting efficiency outweigh the costs of writing and enforcing additional contracts, spinoffs will increase the value of their parent shares (Hite and Owers, 1983).
Desai and Jain (1999) suggest that focusing on the core activity of the company is an important reason for a spin-off transaction. The divestiture of the non-core assets is referred to the increase of the corporate focus. The remaining core-assets will be better managed after the spin-off and this improves the operating efficiency of the assets of the parent company (Desai and Jain, 1999). Daley, Mehrotra and Sivakumar(1997) suggest that the spin-off of the non-core business is associated with share price improvement. An explanation is that firms undertaking focus-increasing spin-offs cause positive market reactions. The parent company
increases the corporate focus through spinning-off the poorly performing assets or the unrelated divisions. The poorly performing assets from the parent company are often sustained through subsidization (Meyer, 1992). A spin-off eliminates the
cross-subsidization (Daley, Mehrotra and Sivakumar 1997). Desai and Jain (1999) also argue that focus on the core activity through a spin-off can cause a better operating performance ratio for the parent company.
Krihnaswami and Subramaniam (1997) and Veld and Merkoulova (2009) suggest that the spin-offs have effects on share prices in terms of cumulative abnormal returns. A spin-off decision should have a positive influence on the stock prices of the parent company because the parent company usually experiences a price jump at the time of a deal announcement (Miles, 1983). Desai and Jain (1999) suggest that with the positive stock returns the investment efficiency of the parent company is better.
The agency focuses on the control in large corporations. An agency relationship is defined as a contract under which one of more principals engage with an agent to perform a service that involves decision-making authority. Inside the company agents want to maximize their utility. A problem is that agents will not choose to create value for the shareholders, but they create value for themselves (Jensen, 1976). Another problem is that the board of
directors makes costs to ensure that the agents create value for the shareholders (Jensen, 1993), Agency costs problems arise when it is more costly to operate two companies together than it would be to operate them separately. A spin-off reduces the agency costs, because of the dismantling of the costs inefficiencies (Woo, Willard & Urs, 1992). To reduce the agency cost problem the board members have to focus on the internal control system of the parent company (Jensen, 1976).
The board of directors advises and monitors the management and has the power to hire and fire management. Jensen and Lipton and Lorsch (1992) were the first to hypothesize that larger board size affects the corporate governance and argue that process and
coordination problems are worse in larger boards. According to Lipton and Lorsch (1992) directors know each other better in smaller boards. This creates more room for discussion and makes it easier to reach general agreement. Lipton and Lorsch (1992) suggest that a board size of eight or nine directors is optimal. Furthermore, Lipton and Lorsch suggest (1992) when a board has more than nine members it becomes more difficult for the board members to express their ideas and opinions to create value for the parent company. The increase in board size occurs with increase in agency costs within the board (Lipton and Lorsch, 1992). The problem is that board members will not choose to create value for the shareholders but
for themselves (Jensen, 1993). Jensen (1993) suggests that the decision-making of a spin-off becomes slower with the involvement of more people. The board members have to make more meetings to reach consensus in a larger board. Jensen (1993) proposes an optimal board size of seven of eight members. According to Jensen, boards that are smaller than this size will lose efficiency, because monitoring of the CEO by the board members becomes harder. Smaller boards should be more effective because it decreases free rider behavior of the board members (Yermack, 1996). In opposite, according to Dalton, Daily, Johnson and Ellestrand (1998) larger boards bring together more specialists, more experience and more knowledge and in the end offer a better advice to create firm value.
2.1 Empirical Review
Ahn (2007) uses a sample of 103 completed tax-free spin-offs listed on the NYSE from the period 1981 to 1997 to investigate the relationship between corporate governance and the spinoff decision. In the results of Ahn board size is inversely related to the probability of a spin-off at the 1 % confidence level. One standard deviation decrease of board size, which is equivalent to a decrease of 1.4 directors, increases the probability of a spin-off by 14%. In order to confirm that the spinoff sample did increase value by refocusing Ahn conducts an event study around the spin-off date. Ahn finds a 3.16% positive abnormal return. Ahn concludes that spin-offs are a value-increasing corporate action where the main purpose is to decrease the size and generally the scope of the firm (Ahn, 1997).
Yermack (1996) empirically examines if larger board size affects the corporate governance. He uses a sample of 452 large American corporations over the period 1984 -1991 and all corporations listed on the NYSE. Yermack observes an inverse relation between the board size and the Tobin’s Q of the 452 large corporations. Tobin’s Q ratio is a measure of firm assets in relation to a firm’s market value. Firm value decreases mostly when board size increases from small (8 board members) to medium (14 board members). Yermack proposes that this correlation could be caused because larger boards lose efficiency.
Seward and Walsh (1996) analyze the design of internal governance mechanisms and relate this to the short-run market reaction of a off. A sample is chosen of 78 corporate spin-offs completed in the US between 1972 and 1987. Seward and Walsh found no relationship
between the board of directors and the abnormal returns when spinning-off a section of the company. The market is not particularly prescient about the kinds of governance and control. The market does not respond so favorably to the spin-offs.
Hite and Owers (1983) use a sample consisting of 116 corporate spin-offs completed in the US between 1972 and 1982 and all listed on the NYSE. They investigate the security price reactions around the spin-offs. A positive relationship was found between the abnormal returns and the spin-off. The cumulative abnormal returns (CARs) twenty days before the first press announcement of the spin-off is 1.8%. The cumulative abnormal returns twenty days after the spin-off are 6.3%. Schipper and Smith (1983) find results similar to Hite and Owers (1983). Schipper and Smith (1983) use a sample of 73 voluntary spin-offs between 1963 and 1981 in the U.S. They investigate the effect of voluntary corporate spin-off on shareholder wealth. The CAR ten days before the spin-off announcement is -0,48% and the CAR ten days after the spin-off is + 3,96%. Miles and Rosenfeld (1983) found significantly abnormal returns following the spin-offs for the parent companies by studying 146 spin-off transactions that took place in the U.S between 1965 -1988. In the research of Miles and Rosenfeld (1983) the relationship between board size and the CAR is positive. Miles and Rosenfeld (1983), Hite and Owers (1983) and Schipper and Smith (1983) conclude that spinning-off a part of the company has a positive effect on the cumulative abnormal returns.
2.2 Literature conclusion
An important reason to spin-off is to focus on the core activity of the parent company (Meyer, 1992). Ahn (2007) empirically concludes that spinoffs are a value-increasing
corporate action where the main purpose is to decrease the size and generally the scope of the firm. Inside the company agents want to maximize their utility, a problem is that agents create value for themselves (Jensen, 1976) Agency costs problems arise when it is more costly to operate two companies together than it would be to operate them separately. A spin-off reduces the agency costs, because of the dismantling of the costs inefficiencies (Woo, Willard & Urs, 1992) Jensen (1993) and Lipton and Lorsch (1992) suggest that larger board size affects the corporate governance and can influence the firm value. According to Jensen
(1993) larger boards will lose efficiency. Yermack (1996) founds that larger board size affects the corporate governance negatively. According to Dalton, Daily, Johnson and Ellestrand (1998) larger boards bring together more specialists, more experience and more knowledge. In the empirical literature there is evidence for a positive relationship between the cumulative abnormal returns of the parent company and the spin-off. Combine the results of the positive cumulative abnormal returns and the influence board size has on the corporate governance and firm value. This research indicates that the board size matters on the value created through a spin-off. In contrast to the researchers before the focus is on the board size of the parent company. Nevertheless, in the U.S, the effect of board size on the cumulative abnormal returns in time of a spin-off has not been explored yet.
3. Methodology
The relationship between cumulative abnormal returns and board size is measured with the following model.
𝐶𝐴𝑅 𝑖 = 𝛼 + 𝛽1𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 𝑖+ 𝛽2𝑅𝑂𝐴 𝑖+ 𝛽3𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑖 + 𝛽4𝑀𝑎𝑟𝑘𝑒𝑡𝑐𝑎𝑝 𝑖+ 𝛽5−15𝑌𝑒𝑎𝑟𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝛽15−26𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀𝑖
The variable 𝐶𝐴𝑅is the dependent variable and shows the cumulative abnormal returns of the parent company. The CAPM: 𝑅𝑖 − 𝑅𝑓 = 𝛼 + 𝛽 (𝑅𝑚 − 𝑅𝑓) is used to calculate the CAR of the parent company, following Woo (1992) and Miles and Rosenfeld (1983). The following model will be regressed 𝑅𝑖 − 𝑅𝑓 = 𝛼 + 𝛽(𝑅𝑚 − 𝑅𝑓) by using the returns on the stock against the returns on the market portfolio of the S&P 500. The estimation period is from 1 year to 1 month before the initial spin-off date t = 0. The estimated parameters are used to calculate the expected returns: 𝐸(𝑅𝑖) − 𝑅𝑓 = 𝛼̂ + 𝛽̂ (𝑅𝑚 − 𝑅𝑓). The abnormal daily returns will be
calculated by subtracting the expected returns from the realized returns. The abnormal returns are summed for each of the event windows before and after the spin-off.
Abnormal return = Actual Return – Expected Return
𝐶𝐴𝑅𝑝𝑎𝑟𝑒𝑛𝑡 𝑖 = ∑ 𝐴𝑏𝑛𝑜𝑟𝑚𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛
𝑒𝑣𝑒𝑛𝑡 𝑤𝑖𝑛𝑑𝑜𝑤𝑠 𝑇=1
;
The event windows analyze the short-term wealth effects of a spin-off in the form of
abnormal stock price increases around the announcement of a spin-off transaction. The event windows of [-1, 0] and [0, +1] are similar to those used by Miles and Rosenfeld (1983) and Maxwell (2003). For the longer run effect the event windows of [-20, 0] and [0, +20] are similar to those used by Hite & Owers (1983). Woo (1992) suggests that short event
windows are less likely to be impacted by other factors than the event windows analyzes. The usefulness for the event windows comes from the fact that the effects of a spin-off
announcement will be reflected immediately in share prices.
The variable 𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 is the number of people on the executive board when the parent company spin-off a section.Similar to Yermack (1996) a logarithm of the size of the board will be used. Board size as a variable is based on research of Miles and Rosenfeld (1983). When the spin-off is completed the relationship between board size and the CAR is expected to positive.
The return on assets (𝑅𝑂𝐴) are the parent’s return on assets prior to the year of the spin-off date, which are calculated as the earnings before interest, taxes and depreciation divided to the total assets of the parent company. Daley (1997) founds that a spin-off
improves performance of the parent company and improves the access to the assets. A larger ROA concludes that the company is more efficient in managing its assets to produce profit. The relationship between this variable and the CAR is expected to be positive (Johnson and Lys, 1990). The ROA is added as control variable because companies with higher total assets could be more affected by spinning-off a part of the company and this could affect the share performance (Daley, 1997).
To control for the monitoring strength of debt holders, the variable leverage is used. The control variable 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 is calculated by total debt of the parent company divided by the total assets. The leverage should have a positive relationship with the cumulative abnormal returns. A higher leverage leads to more monitoring of the parent company (Cusatis, Miles &
Woolridge, 1993). Parent companies with higher leverage experience higher abnormal return when spinning-off a part of the company (Woo, 1992).
The variable 𝑀𝑎𝑟𝑘𝑒𝑡𝑐𝑎𝑝, also referred as firm size, is the variable for controlling the differences in the market capitalization of the companies in million dollars. Similar to Daley (1997) a logarithm of the firm size is used. Firm size is an important forecaster of financial performance. Marketcap is calculated by multiplying the numbers of shares outstanding by the share price. According to Maxwell (2003) there is a positive relationship between the CAR and market capitalization. Larger spinoffs are expected to provide higher returns than smaller spinoffs. The stock prices should have a positive influence on the market
capitalization (Miles and Rosenfeld 1983).
Nixon (2000) states that a corporate spin-off is industry dependent. The spin-off levels differ across industries, for example, according to their levels of leverage. For this reason a group of dummy variables is added to control for the different industries. Year dummies are included to control for potential differences caused by the year the spin-off takes place.
In order to test if the board size matter on the value that is created on a spin-off the following hypothesis is designed.
(1) There is a positive significant relationship between the board size of the parent company and the value created on cumulative abnormal returns through a spin-off. If a significant relationship is found then this relationship will be analyzed. If no significant relationship is found then possible reasons will be discussed.
4. Data
The sample that is used contains parent companies located in the United States of America (USA) that are listed on the New York Stock Exchange (NYSE). The Zephyr Database
provides all data concerning the spin-offs.1 In this research data on the period January 1st of 2003 – December 31st of 2013 is used. The final sample consists of 93 companies. A list of the companies and the subsidiary can be found in the Appendix. Data concerning board size of the parent-listed company, market capitalization, return on assets (ROA) and leverage is obtained from the database DataStream. The market return is taken from CRSP and the stock returns and the share prices are taken from DataStream. Following Maxwell (2003) and Yermack (1996) the S&P 500 is used as the market portfolio. The risk free rate is taken from the website of French.
Table 1) descriptive statistics of the full sample.
Data sample (N = 93) Average Std. Dev. Minimum Maximum
CAR [-20, 0] CAR [-1, 0] CAR [0, +1] CAR [0, +20] Boardsize 0.93 1.21 3.24 3.82 11 3.90 2.96 7.34 6.90 2.55 -18.34 -13.65 -16.43 -12.93 5 10.03 11.43 12.58 16.68 19 ROA (%) 4.39 9.31 -16.80 30.04 Leverage (%) 0.28 0.19 0 0.88 Market Capitalization ($mln) 20037 13819 47 128653
The “Market Capitalization ” and “BoardSize” variables are both a logarithm.
Table 1 gives an overview of the full sample average and the standard deviation for the year’s 2003-2013. The average CAR twenty days before the spin-off is 0.9321%, the average CAR twenty days after the spin-off is 3.8232%. The stock prices of the parent firms increases when the spin-off is completed and shows no large abnormal return before the spin-off is
completed. The increase of the CARs after the spin-off could be the result of the positive reaction of the investors to the expected value gains from the spin-off. The increase of the cumulative abnormal returns after the spin-off corresponds with the results of Schipper et al. (1983), Miles et al. (1983) and Hite et al. (1983) this indicates that spin-off of the parent company has a positive influence on the CAR. Most of the cumulative abnormal returns effects occur in the [-1, +1] interval. As mentioned earlier Lipton and Lorsch (1992)
recommended a board size of seven or eight board members. The descriptive statistics show that the average board size is eleven members, an underlying reason could be that the
disadvantages of a larger board (i.e. poorer process and coordination problems) are outweighed by the advantages (more people, thus more monitoring).
Taking a look at Figure 1 for all the event windows, which graphs the CAR of the parent company against the boards’ size, it seems there is a positive relationship between the CAR and the board size when a spin-off is completed.
Figure 1) a scatterplot between the cumulative abnormal returns and the board size for all the event windows.
5. Regression Results
OLS was used to estimate the effect of the board size of the parent company on the CAR of the parent company. The event windows are [-20, 0], [-1,0], [0, +1] and [0, +20]. The results
of the OLS regressions are summarized in table 2:
Table 2) OLS regression results the relationship between CAR and board size before and after the spin-off.
(1) (2) (3) (4)
CAR [-20, 0] CAR [-1, 0] CAR [0, +1] CAR [0, 20]
Log (Boardsize) 0.741* 0.819* 0.801* 0.712* (0.432) (0.504) (0.502) (0.411) ROA (%) 0.582 0.541 0.682 0.801 (0.743) (1.221) (0.694) (1.898) Leverage (%) 0.0412 0.0487 0.0372 0.0562 (0.092) (0.073) (0.213) (0.083) Log (Marketcapitalization) 1.221*** 1.173*** 1.198*** 1.221*** (0.401) (0.352) (0.301) (0.533) Constant 1.54 2.89 2.69 1.54 (1.46) (3.09) (3.89) (4.66)
Year Fixed Effects Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes
Observations 93 93 93 93
R-squared 0.3901 0.3712 0.4090 0.4212
Adjusted R2 0.3451 0.3687 0.3329 0.3807
***, **, * Indicates significance at 1%, 5% and 10%, respectively. Standard errors are reported in parentheses.
Results for the full sample are reported in column 1-4. In all of the 4 regressions the board size has a significantly positive effect on the cumulative abnormal returns of the parent company before and after the spin-off. This indicates that the spin-off decision has a positive influence on the stock prices of the parent company. The positive effects on the CARs are small compared to the standard deviations in table 1. The findings of the positive relationship are inconsistent with the results of Yermack (1996) who founds that board size has a negative relationship with the firm value. Thus the costs associated with the free-riding behavior of larger boards before the spin-off do not seem to outweigh the positive effects of a larger board after the spin-off. When the spin-off occurs larger boards manage the parent
relationship with the firm value. An explanation of the firm value after the spin-off is the focus on the core activity of the parent company. However, another explanation could be that the board size of the parent company is smaller after the spin-off because the spin-off is splitting up the board. After the spin-off the smaller board of the parent company has a positive effect on the relationship with the cumulative abnormal returns. The results can be interpreted that before the spin-off larger boards are inefficient. Dalton (1998) suggests that a larger board create more efficiency. The results can’t show that larger boards bring together more specialists that creates more experience, more knowledge and offer a better advice and therefore contributes to higher firm value (Dalton, 1998). Inside the companies agents maximize the value for the shareholders. The results correspond with the research of Miles and Rosenfeld (1983).
For all four models the, OLS regressions show a significantly positive relationship between the market capitalization and the CAR. The findings correspond to the research of Maxwell (2003) when CAR is higher there is a higher market capitalization, indicating that the market anticipates considerable shareholder wealth enhancement. The spin-off has a positive effect on the share price and creates more value for the shareholders (Miles and Rosenfeld, 1983). The other control variables are all insignificant. The return on assets has a positive effect on the CAR in line with the findings of Johnson and Lys (1990). A higher ROA implies a better performance of the parent company. In addition the positive ROA concludes that a company is more efficient in managing its assets to produce profits. The leverage has a positive effect on the CAR, implying that when a company earns higher abnormal returns, its leverage ratio increases. A higher leverage leads to more monitoring of the parent company. This shows that increasing leverage makes asset owners more vulnerable (Cusatis et.al, 1993).
To investigate the effect on board size and the control variables when making an OLS regression with less control variables, the model will be tested with the event windows [-20, 0] and [0, +1] to describe the effect before the spin-off and right after the spin-off. The results of the OLS with the event window [-20,0] are summarized in table 3. The results of the OLS with the event window [0, +1] are summarized in table 4. However, in table 3, there is still a 10% positive significant relationship between the board size and the CAR. In table 4 there is as well a 10% significant relationship between the board size and the CAR. Board size is robust for different specifications of the model.
Table 3) OLS regression results relationship between CAR and board size before spin-off leaving out control variables.
(1) (2) (3) (4) (5) (6)
CAR
[-20, 0] [-20, 0] CAR [-20, 0] CAR [-20, 0] CAR [-20, 0] CAR [-20, 0] CAR
Log(Boardsize) 1.802* 1.512* 1.609* 1.812* 1.243* 0.9821* (1.01) (0.799) (0.899) (1.01) (0.755) (0.522) ROA (%) 1.853* 1.550 1.881 (1.062) (1.301) (-1.333) Leverage (%) 0.144 0.291* (-1.444) (0.220) Log(Marketcapitalization) 1.501*** 0.909*** 1.441*** (0.422) (0.53) (0.499) Constant -2.51 -2.54 3.01 -5.56 2.23 3.82 (3.97) (3.98) (7.934) (4.98) (1.99) (-3.93)
Year Fixed Effects Yes No Yes No No No
Industry Fixed Effects Yes No Yes Yes No No
Observations 93 93 93 93 93 93
R-squared 0.2321 0.2434 0.2671 0.3019 0.3091 0.3254
Adjusted R2 0.2122 0.1902 0.1693 0.2716 0.2999 0.3621
***, **, * Indicates significance at 1%, 5% and 10%, respectively. Standard errors are reported in parentheses.
Table 4) OLS regression results relationship between CAR and board size after a spin-off leaving out control variables.
(1) (2) (3) (4) (5) (6)
CAR
[0,+1] [0,+1] CAR [0,+1] CAR [0,+1] CAR [0,+1] CAR [0,+1] CAR
Log(Boardsize) 1.233* 1.041* 1.432* 1.005* 0.992* 0.853* (0.699) (0.619) (0.799) (0.582) (0.541) (0.491) ROA (%) 2.218** 1.424 0.987 (1.129) (0.878) (1.433) Leverage (%) 0.244* 0.091 (0.149) (0.854) Log(Marketcapitalization) 1.128*** 0.849*** 1.221*** (0.454) (0.401) (0.373) Constant 1.91 2.51 3.01 -3.44 2.99 2.65 (4.54) (-1.42) (2.43) (1.64) (-4.33) (2.12) Year Fixed
Effects Yes No Yes No Yes No
Industry Fixed
Effects Yes No No Yes Yes No
Observations 93 93 93 93 93 93
0.2511 0.2812
0.2912 0.2976 0.3412 0.3121
Adjusted R2 0.1892 0.2409 0.2654 0.2612 0.2987 0.2912
***, **, * Indicates significance at 1%, 5% and 10%, respectively. Standard errors are reported in parentheses.
To find out whether the relationship between cumulative abnormal returns and board size changed during and after the most recent global financial crisis, a crisis dummy variable is added to the regression:
𝐶𝐴𝑅 𝑖 = 𝛼 + 𝛽1𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 𝑖+ 𝛽2𝐶𝑟𝑖𝑠𝑖𝑠 𝑖+ 𝛽3𝐵𝑜𝑎𝑟𝑑𝑠𝑖𝑧𝑒 𝑖∗ 𝐶𝑟𝑖𝑠𝑖𝑠 𝑖 + 𝛽4𝑅𝑂𝐴 𝑖 + 𝛽5𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑖 + 𝛽6𝑀𝑎𝑟𝑘𝑒𝑡𝑐𝑎𝑝 𝑖 + 𝛽7−18𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑑𝑢𝑚𝑚𝑖𝑒𝑠
+ 𝛽19−29𝑌𝑒𝑎𝑟𝑑𝑢𝑚𝑚𝑖𝑒𝑠 + 𝜀𝑖
Crisis is a dummy variable, which is 0 if the off took place before 2008 and 1 if the spin-off took place since 2008. The reason for the crisis dummy is to investigate the effect on board size before the crisis, the effect on board size since the crisis of 2008 and the effect on board after the crisis. The sample occurs of 50 spin-offs before the crisis in 2008 and occurs 43 spin-offs since 2008.
Table 5) OLS regression results relationship between CAR and board size adding the crisis dummy and interaction variable board size * crisis.
(1) (2) (3) (4)
CAR [-20, 0] CAR [-1, 0] CAR [0, +1] CAR [0, 20]
Log(Boardsize) 0.542* 0.431* 0.581* 0.423* (0.354) (0.235) (0.341) (0.231) Crisis -0.28 -0.38 -0.93 -0.63 (0.21) (0.42) (1.02) (0.98) Log(Boardsize) * Crisis 0.75 1.29 1.18 0.15 (8.32) (5.34) (6.12) (4.12) ROA (%) 0.421 0.428 0.521 0.498 (0.934) (0.862) (1.231) (1.012) Leverage (%) 0.042 0.053 0.063 0.051 (0.102) (0.201) (0.199) (0.201) (Log)Marketcapitalization 1.021*** 0.989*** 1.211*** 1.198*** 0.456 0.321 0.532 0.489
Constant 0.96 -1.32 0.85 N -1.19
(-1.96) (1.55) (1.61) (1.43)
Year Fixed Effects No No No No
Industry Fixed Effects Yes Yes Yes Yes
Observations 93 93 93 93
R-squared 0.2395 0.1876 0.2178 0.2311
Adjusted R2 0.1844 0.145 0.1712 0.1654
***, **, * Indicates significance at 1%, 5% and 10%, respectively. Standard errors are reported in parentheses.
Table 5 shows a negative relationship between the dummy crisis and the CAR for all the event windows. The results conclude that the spin-offs, which occurred since 2008, perform worse cumulative abnormal returns in the event windows than the spin-offs that took place before the crisis period. To measure the effect of board size on the cumulative abnormal returns before the crisis in 2008 relative to the years since 2008, the interaction variable between board size and the crisis dummy is added. In table 5 the interaction variable is positive for all presented specifications. This indicates that the effect of board size on the spin-off performance is positively affected whether the spin-off took place in the crisis or not. The coefficients are not significant so it is not possible to conclude that the effect of board size since the crisis in 2008 differs from the board size effect before the crisis period.
6. Conclusion
This thesis tries to find out if board size matters for the value that is created in a corporate spin-off. A positive relationship between the board size and the cumulative abnormal returns in the event windows is expected. A sample of 93 American companies are used, all of them listed on the New York Stock Exchange. Spin-offs may create value because; the board members are focusing on the core activity of the parent company, spin-offs reduce the agency costs and spin-offs create potential increasing in the future flexibility of the shareholders portfolio decisions. Because of the previous reasons the spin-off has a positive effect on the share prices. Results for the full sample with the event windows [-20, 0], [-1,0], [0, +1] and [0, +20] show a significantly positive relationship between the board size of the parent company and the cumulative abnormal returns. Thus the costs associated with the free-riding behavior of larger boards before the spin-off do not seem to outweigh the positive effects of a larger board after the spin-off. When the spin-off occurs larger boards manage the parent companies better because an increase in the board size will have a positive effect on the
CAR. Another explanation is possible, the board size of the parent company is smaller after the spin-off, and has a positive effect on the relationship between board size and the CAR. The results can be interpreted that before the spin-off larger boards are inefficient. Splitting up a company through a spin-off create more value so board size decreases. The results cannot indicate that larger boards bring together specialists that create more experience and knowledge and therefore together contribute to higher firm value. The spin-offs, which occurred since 2008, perform worse CARs in the event windows than the spin-offs that took place before the crisis period. The board size on the spin-off performance is positively
affected whether the spin-off took place in the crisis or not. Based on all the results, it can be concluded that board size will have a significantly positive effect on the cumulative abnormal returns of the parent company when spinning-off a section of the company.
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Appendix:
Parent Company Subsidiary
Data Spin-off Completed
INTERNATIONAL BUSINESS MACHINES
CORPORATION IBM CORPORATION'S HARD DISK DRIVE BUSINESS 02/01/2003 DTE ENERGY COMPANY DTE ENERG'S ELECTRIC TRANSMISSION SYSTEM 10/03/2003 PFIZER INC. PFIZER INC.'S INFANT NUTRITION BUSINESS 28/03/2003 WILLIAMS COMPANIES INC., THE WILLIAMS COMPANIES INC.'S TEXAS GAS PIPELINE 16/05/2003 GENERAL ELECTRIC COMPANY GE EDISON LIFE INSURANCE COMPANY 29/08/2003 AOL TIME WARNER INC.
WARNER MUSIC GROUP'S CD AND DVD MANUFACTURING
DIVISION 24/10/2003 AFFILIATED COMPUTER SERVICES INC.
AFFILIATED COMPUTER SERVICES INC'S
GOVERNMENT-SYSTEMS UNIT 30/11/2003 DST SYSTEMS INC.
DST SYSTEMS INC.'S COMMERCIAL PRINTING AND GRAPHICS
DESIGN BUSINESS 16/12/2003 CIGNA CORPORATION
CIGNA CORPORATION'S RETIREMENT AND INVESTMENT
SERVICES BUSINESS 01/04/2004 DUKE ENERGY CORPORATION (OLD)
DUKE ENERGY NORTH AMERICA'S ASSETS OUTSIDE THE
MIDWESTERN US 23/04/2004 CNA FINANCIAL CORPORATION
CNA FINANCIAL CORPORATION'S INDIVIDUAL LIFE INSURANCE
BUSINESS 30/04/2004 JC PENNEY COMPANY INC.
ECKERD CORPORATION'S 1539 NORTHEAST AND
MID-ATLANTIC DRUGSTORES 01/08/2004 EASTMAN KODAK COMPANY
EASTMAN KODAK COMPANY'S DOCUMENT IMAGING
BUSINESS' CERTAIN ASSETS 07/10/2004 OWENS-ILLINOIS INC. OWENS-ILLINOIS INC.'S BLOW-MOLDED UNIT 29/10/2004 BELLSOUTH CORPORATION BELLSOUTH CORPORATION'S LATIN AMERICAN ASSETS 09/11/2004 CITIGROUP INC. EMI GROUP LTD'S RECORDED MUSIC DIVISION 22/02/2005 CSX CORPORATION
CSX CORPORATION'S GLOBAL CONTAINER TERMINAL
NETWORK 02/05/2005
INTERNATIONAL BUSINESS MACHINES
CORPORATION IBM CORPORATION'S PC BUSINESS 02/05/2005 MEADWESTVACO CORPORATION MEADWESTVACO CORPORATION'S PAPERS BUSINESS 30/05/2005 WEYERHAEUSER COMPANY LTD
WEYERHAEUSER COMPANY LTD'S CONTAINERBOARD,
PACKAGING AND RECYCLING BUSINESS 16/06/2005 KRAFT FOODS INC. KRAFT FOODS INC.'S CERTAIN CONFECTIONERY ASSETS 30/06/2005 ASHLAND INC. VALVOLINE INSTANT OIL CHANGE 05/07/2005 SAKS INC. SAKS INC.'S NORTHERN DEPARTMENT STORE GROUP 31/08/2005 CROWN HOLDINGS INC.
CROWN HOLDINGS INC.'S GLOBAL PLASTIC CLOSURES
BUSINESS 09/01/2006 WACHOVIA CORPORATION
WACHOVIA CORPORATION'S CORPORATE TRUST AND
SAKS INC. SAKS INC.'S SOUTHERN DEPARTMENT STORE GROUP 06/04/2006 ONEOK INC.
ONEOK INC'S GATHERING AND PROCESSING, NATURAL GAS
LIQUIDS, AND PIPELINES AND STORAGE SEGMENTS 21/04/2006 BOSTON SCIENTIFIC CORPORATION ABBOTT LABORATORIES INC. 04/05/2006 DUKE ENERGY CORPORATION (OLD) LS POWER EQUITY PARTNERS 06/07/2006 JP MORGAN JP MORGAN'S CORPORATE-TRUST BUSINESSES 15/08/2006 CAMPBELL SOUP COMPANY CAMPBELL SOUP COMPANY'S UK BUSINESS 02/10/2006 JP MORGAN
JP MORGAN CHASE & CO'S LIFE INSURANCE AND ANNUITY
UNDERWRITING BUSINESS 03/11/2006 NORTHEAST UTILITIES NE ENERGY INC. 14/12/2006 GENERAL ELECTRIC COMPANY AMERICAN INTERNATIONAL GROUP INC. 15/12/2006 CONSTELLATION ENERGY GROUP INC.
CONSTELLATION ENERGY GROUP INC'S 6 GAS-FIRED PLANTS IN
CALIFORNIA, TEXAS, ILLINOIS, WEST VIRGINIA AND VIRGINIA 29/12/2006 3M COMPANY
3M COMPANY'S US, CANADIAN AND LATIN AMERICAN
PHARMACEUTICALS BUSINESS 02/01/2007 3M COMPANY 3M PHARMA'S BUSINESS IN EUROPE 31/01/2007 ROCKWELL AUTOMATION INC.
CONSTELLATION ENERGY GROUP INC'S 6 GAS-FIRED PLANTS IN
CALIFORNIA, TEXAS, ILLINOIS, WEST VIRGINIA AND VIRGINIA 28/02/2007 WEYERHAEUSER COMPANY LTD WEYERHAEUSER COMPANY LTD'S FINE PAPER BUSINESS 10/04/2007 CARDINAL HEALTH INC. PHARMACEUTICAL TECHNOLOGIES AND SERVICES 01/05/2007 MIRANT CORPORATION
MIRANT CORPORATION'S SIX US NATURAL GAS FIRED POWER
PLANTS 02/05/2007
CMS ENERGY CORPORATION XTO ENERGY INC. 01/07/2007 VALERO ENERGY CORPORATION VALERO ENERGY CORPORATION'S OHIO-BASED OIL REFINERY 02/07/2007 DOMINION RESOURCES INC.
DOMINION RESOURCES INC.'S OFFSHORE NATURAL GAS AND
OIL EXPLORATION AND PRODUCTION OPERATIONS 31/07/2007 DOMINION RESOURCES INC.
DOMINION RESOURCES INC.'S ONSHORE NATURAL GAS AND OIL EXPLORATION AND PRODUCTION OPERATIONS IN THE
PERMIAN BASIN, MICHIGAN AND ALABAMA 01/08/2007 HUNTSMAN CORPORATION HUNTSMAN PACKAGING CORPORATION 01/08/2007 INTERNATIONAL PAPER COMPANY
INTERNATIONAL PAPER COMPANY'S COATED AND
SUPERCALENDERED PAPERS BUSINESS 01/08/2007 CITIGROUP INC. CITICAPITAL'S TRANSPORTATION FINANCIAL SERVICES GROUP 09/08/2007 MIRANT CORPORATION MIRANT CORPORATION'S PHILIPPINES BUSINESS ASSETS 03/09/2007 PRIDE INTERNATIONAL INC.
PRIDE INTERNATIONAL INC'S LATIN AMERICAN LAND DRILLING
AND E&P SERVICES BUSINESSES 01/10/2007 PROCTER & GAMBLE COMPANY PROTECTIVE LIFE INSURANCE COMPANY 01/11/2007 QUICKSILVER RESOURCES INC.
QUICKSILVER RESOURCES INC.'S MICHIGAN, INDIANA AND
KENTUCKY ASSETS 07/01/2008 BOSTON SCIENTIFIC CORPORATION NORTHERN BORDER LP 30/04/2008
H&R BLOCK INC.
OPTION ONE MORTGAGE CORPORATION'S MORTGAGE
SERVICING BUSINESS 29/05/2008 AES CORPORATION EKIBASTUZSKAYA GRES-1 TOO 03/06/2008 DEVON ENERGY CORPORATION
DEVON ENERGY CORPORATION'S EQUATORIAL GUINEA-BASED
BUSINESS 28/07/2008 HONEYWELL INTERNATIONAL INC.
HONEYWELL INTERNATIONAL INC'S CONSUMABLES
SOLUTIONS BUSINESS 04/08/2008 WEYERHAEUSER COMPANY LTD
WEYERHAEUSER COMPANY LTD'S CONTAINERBOARD,
PACKAGING AND RECYCLING BUSINESS 31/03/2009 CHEVRON CORPORATION CHEVRON CORPORATION'S PETROL STATIONS 30/10/2009 PROCTER & GAMBLE COMPANY 01/12/2009 FORTUNE BRANDS INC. FORTUNE BRANDS INC.'S US WINE BUSINESS 19/02/2010 DYNEGY INC. DYNEGY INC.'S 8 POWER PLANTS 30/04/2010 TEREX CORPORATION TEREX CORPORATION'S MINING EQUIPMENT BUSINESS 24/05/2010 DOMINION RESOURCES INC.
DOMINION RESOURCES INC.'S APPALACHIAN OIL AND GAS
EXPLORATION AND PRODUCTION OPERATIONS 01/06/2010 PETROHAWK ENERGY CORPORATION
PETROHAWK ENERGY CORPORATION'S HAYNESVILLE SHALE
GATHERING AND TREATING BUSINESS 01/07/2010 MORGAN STANLEY MORGAN STANLEY'S RETAIL ASSET MANAGEMENT BUSINESS 03/10/2010 VERIZON COMMUNICATIONS INC. NEW COMMUNICATIONS HOLDINGS INC. 23/11/2010 COCA-COLA COMPANY, THE COCA-COLA COMPANY'S BOTTLING OPERATIONS IN NORWAY 23/11/2010 LOCKHEED MARTIN CORPORATION NEW COMMUNICATIONS HOLDINGS INC. 06/12/2010 WILLIAMS COMPANIES INC., THE WILLIAMS COMPANIES INC., THE'S CANADA OPERATIONS 03/01/2011 CALPINE CORPORATION CALPINE CORPORATION'S NATURAL GAS POWER PLANT 31/03/2011 BOSTON SCIENTIFIC CORPORATION
BOSTON SCIENTIFIC CORPORATION'S NEUROVASCULAR
INTERVENTION BUSINESS 29/04/2011 ASHLAND INC. MARATHON OIL CORPORATION 02/05/2011 MOTOROLA SOLUTIONS INC. MOTOROLA SOLUTIONS INC.'S ENTERPRISE BUSINESS 01/05/2012 RANGE RESOURCES CORPORATION RANGE RESOURCES CORPORATION'S SUBSIDIARY 09/05/2012 MEADWESTVACO CORPORATION
MEADWESTVACO CORPORATION'S CONSUMER & OFFICE
PRODUCTS BUSINESS 28/09/2012 AT&T INC. KRAFT FOODS 22/10/2012 CHESAPEAKE ENERGY CORPORATION
CHESAPEAKE ENERGY CORPORATION'S ASSETS IN THE SOUTHERN DELAWARE BASIN PORTION of THE PERMIAN
BASIN 31/10/2012
ILLINOIS TOOL WORKS INC. ILLINOIS TOOL WORKS INC.'S DECORATIVE SERVICES DIVISION 01/11/2012 BECTON DICKINSON AND COMPANY
BECTON DICKINSON AND COMPANY'S MAJORITY of
DISCOVERY LABWARE UNIT 30/11/2012 PFIZER INC. PFIZER INC.'S SCHICK-WILKINSON SWORD UNIT 28/01/2013 PPG INDUSTRIES INC. PPG INDUSTRIES INC.'S COMMODITY CHEMICALS BUSINESS 15/02/2013
EXCO RESOURCES INC.
EXCO RESOURCES INC.'S PRODUCING US CONVENTIONAL OIL
AND GAS ASSETS 26/02/2013 SANDRIDGE ENERGY INC.
SANDRIDGE ENERGY INC.'S PRODUCING ASSETS IN THE
PERMIAN BASIN 01/03/2013 KINDER MORGAN INC. KINDER MORGAN ENERGY LP 03/04/2013 MCGRAW-HILL COMPANIES INC., THE
MCGRAW-HILL COMPANIES INC.'S MCGRAW-HILL EDUCATION
BUSINESS 14/05/2013 COMSTOCK RESOURCES INC. COMSTOCK RESOURCES INC.'S PERMIAN BASIN ASSETS 18/07/2013 SPECTRA ENERGY CORPORATION
SPECTRA ENERGY CORPORATION'S EXPRESS-PLATTE PIPELINE
SYSTEM 03/09/2013
SOUTHERN UNION COMPANY INC. MISSOURI GAS ENERGY INC.'S ASSETS 27/09/2013 EASTMAN KODAK COMPANY
EASTMAN KODAK COMPANY'S DOCUMENT IMAGING
BUSINESS' CERTAIN ASSETS 01/11/2013 JOHNSON CONTROLS INC. JOHNSON CONTROLS INC.'S HOMELINK BUSINESS 04/11/2013 APACHE CORPORATION APACHE CORPORATION'S GULF of MEXICO SHELF BUSINESS 14/11/2013 HESS CORPORATION
HESS CORPORATION'S ENERGY MARKETING BUSINESS IN NEW
