Uncertainty concerning supporting IT functions during the unstable business period of the corporate spin-off Master Thesis Naam: J.P. Wiercx Student nr.: 10092242 Begeleider: J. Hinloopen Versie: Concept
MSc Business Economics, specialization Organization Economics. ECTS: 15
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Verklaring eigen werk
Hierbij verklaar ik, Jasper Wiercx, dat ik deze scriptie zelf geschreven heb en dat ik de volledige verantwoordelijkheid op me neem voor de inhoud ervan.
Ik bevestig dat de tekst en het werk dat in deze scriptie gepresenteerd wordt origineel is en dat ik geen gebruik heb gemaakt van andere bronnen dan die welke in de tekst en in de referenties worden genoemd.
De Faculteit Economie en Bedrijfskunde is alleen verantwoordelijk voor de begeleiding tot het inleveren van de scriptie, niet voor de inhoud.
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Abstract
The purpose of this thesis is to gain better insight in the relationship between the transitional IT services provided by the former parent firm and the financial performance of a corporate spin-off. This relationship makes it possible to test the influences of the principal-agent theory and the information hypothesis in an unstable business period. Uncertainty about the supporting IT services that arise due to the duration of the transitional IT services and the structure of the governance contracts can be detrimental to the operating performance and market valuation. By means of historical financial data and publicly accessible governance contracts of 65 firms there has been attempted to explain these relationship. The results indicate that the relationship between the governance structure of TSA and the duration of these services are not significant and thus do not influence the market valuation and the operating performance. This study helps firms better implement and govern their transitional services when engaging in a corporate spin-off.
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Table of Contents
1. Introduction ... 5
2. Literature review ... 7
2.1 IT business value... 7
2.2 Corporate spin off ... 9
2.3 Transition Service Agreement ... 11
2.4 Principal-Agent theory & Contract theory ... 14
2.5 Hypotheses ... 15
2.5.1 Uncertainty ... 15
2.5.2 Hypothesis 1: Market valuation of spin-off firm ... 16
2.5.3 Hypothesis 2: Operating performance, TSA governance and spin-off firm. ... 17
2.5.4 Influence of business restructuring, IT and operating performance of the spin-off firm. ... 18 3. Data set... 20 3.1 Sample... 20 3.2 Independent variables ... 21 3.3 Dependent variables ... 26 3.5 Model ... 27 4. Results ... 28
4.1 Standardization, outliers and heteroscedasticity ... 28
4.2 Pairwise Pearson correlation coefficients ... 31
4.3 Regression models ... 32
4.3.1 Regression models of closing time of the deal ... 34
4.3.2 Regression models of market valuation ... 34
4.3.3 Regression models of ROA improvement ... 36
4.4 Possible limitations ... 40
4.4.1 Internal validity ... 40
4.3.2 External validity ... 43
5. Discussion and Conclusion ... 43
6. Literature ... 45
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1. Introduction
Transactions between companies is a popular topic of research in the organization economics (Hart, 1995). A popular perspective in this topic is the neoclassical view that assumes that all economic entities, including firms, operate in their own selfish interest. The agency theory explains that this selfish interest might result in conflicts concerning the tasks that were pre-arranged in the relationship of the transaction. Ultimately, this can be detrimental to the principal and recipient of the transaction (Alchian & Demsetz, 1972). Outsourcing of IT services have gained tremendously in popularity over the last couple of years. However, outsourcing is a transaction relationship between a service provider and a recipient and subject to the Principal-Agent theory. In order to safeguard outsourcing activities from potential hazards, i.e. shirking and opportunistic behavior of the service provider, contracts with governance structure are designed (Lacity & Willcocks, 1998).
A corporate spin-off, where a business divests a division to become an independent company, is a popular implementation of corporate restructuring (Bergh, Johnson & Dewitt, 2008; Krishnaswami & Subramaniam, 1999). However, the period directly after the spin-off is a very unstable period for its business operations. The new independent company has the
challenging task to retain its business operations while restructuring its business in order to become fully independent. To balance both conflicting objectives often spin-off firms engage in a relationship in which they outsource supporting business functions to the parent firm for a pre-determined period of time, namely transitional services. The supporting services of information communication and technology (IT) is particularly popular to cover with transitional services in the period directly after the spin-off. However, given the importance of IT as strategic and supporting resource on business level (Roberts, Galluch, Dinger & Grover, 2012; Li & Ye, 1999; Oh & Pinsonneault, 2007), problems can arise that are detrimental to the business operations and the performance of the spin-off. Especially given the fact that providing IT services is most likely not the core business of the former parent firm. Where reputation might mitigate the conflict of interest in an outsourcing relationship with professional IT service providers, this most likely does not play a role in the transitional relationship between the former parent and spin-off firm. In addition, practitioners point out that parent firms often perceive transitional services as a nuisance and a distraction from their own key operations (Accenture, 2014; Deloitte, 2008). From an organization economic perspective, uncertainty arising from the
6 supporting function of transitional services and principal-agent theory might influence the
operating performance of the spin-off company. From a finance perspective, the engagement in transitional services might signal investors that the spin-off firm is not capable to operate independently and thereby influence the market valuation of the spin-off firm. In this thesis the specifications of the transitional IT services will be defined as a level of uncertainty. On the one side, uncertainty concerning the transitional IT functions on an operations level, due to principal-agent theory, might influence the operating performance while on the other side uncertainty concerning future IT functions, due to information hypothesis, might influence the market valuation of the spin-off.
In order to inform investors and govern transitional services during the spin-off, Transition Service Agreements (TSA) are constructed. This legal agreement documents the transitional services that will be provided between former parent and dividing subsidiary and how they are governed. The extensiveness of the governance structure of the TSA and the duration of service might help mitigate the uncertainty concerning these services and therefore influence the financial performance of the spin-off. In this thesis an empirical research is conducted in order to determine how transitional IT services and their agreements influence the financial performance of the spin-off.
Outsourcing IT relationships and contract structure are mostly researched in a situation where reputation plays a role. In addition, most research focus on the influence during stable periods of operations. This thesis is an addition to the existing literature because we empirically analyze how IT outsourcing with no reputational concerns during unstable periods are influenced by uncertainty due to contract terms. From a business perspective this research adds to the existing literature as it hopes to gain insight in how to structure transitional IT services properly.
The results in the analyses indicate that there is no influence of uncertainty concerning the IT services in a corporate spin-off. A more extensive governance structure or a longer duration of transitional IT services do not seem to influence the operating performance. In addition, the duration of the transitional IT services do not seem to influence the market
valuation on the first trading day of the spin-off firm. Thus, according to the results, transitional IT services do not influence the financial performance of the spin-off.
In the remainder of this thesis the following will subsequently be addressed. First, the theoretical foundation will be discussed. Second, the historical data and methodology will be
7 clarified. Third, the results will be presented in an overview and carefully examined. Lastly, the conclusion and discussion about limitations and future research will be discussed.
2. Literature review
In this chapter the academic background of this thesis will be discussed. This will be done in the following procedure. First, an introduction of the main topics will be given in order to give a clear image of each of these topic and why they are relevant in this thesis. The topics that will be discussed are IT business value, the corporate spin-off and TSA. Each of the topics will be discussed in a separate paragraph. Second, the economic theory that drives this thesis will be elaborated. The economic theories are the information hypothesis, principal agent theory and contract theory. Third, the aforementioned thesis topics will be linked to each other and the economic theories. Lastly, this discussion will result in the construction of the hypotheses.
2.1 IT business value
In this thesis Information Technology (IT) is defined as computers as well as related digital communication technology (Brynjolfsson & Hitt, 2000; Oh & Pinsonneault, 2007). IT has developed strongly the past decades and is an interesting topic for academic research because of its growing role in organizations. A primary finding in the literature is that IT adds value, where IT business value is defined as “the organizational performance impacts of information
technology at both the intermediate process level and the organization-wide level, and
comprising both efficiency impacts and competitive impacts” (Melville, Kraemer & Gurbaxani, 2004, p. 287). In the paper of Brynjolfsson and Hitt (2000) they review the academic evidence on how IT is linked with productivity, firm performance, market value and organizational transformation. They conclude that the evidence, shown in their meta-analysis and supporting case study, indicates that IT has created substantial business value for firms.
In the IT academic literature two different perspectives, (i) resource-centered perspective and (ii) contingency-based perspective, support the fact that IT can be used as a strategic
resource and thereby add value to the organization. The resource-centered perspective considers IT as a strategic resource that can directly influence organizational performance when properly combined with other strategic resources (Oh & Pinsonneault, 2007). This perspective has been developed by Barney (1991) and indicates that IT is important to gain competitive advantage by reducing costs and improving revenues and has been empirically tested and confirmed (Melville
8 et al., 2004; Mata, Fuerst & Barney, 1995). The contingency-based perspective suggests that the strategic value of IT must be understood in conjunction with a firm’s strategy and stresses the importance of alignment between the business strategy and IT strategy (Oh & Pinsonneault, 2007). In empirical studies it has been shown, by means of survey (Chan, Huff, Barclay & Copeland, 1997) and historical data from COMPUSTAT (Li & Ye, 1999), that IT is positively associated with financial performance, including return on assets. Although both views have different opinions about the strategic implication of IT on a business level, they both widely agree on the influence of IT on the business performance and operations. According to Oh & Pinsonneault (2007), whom have collected data among a survey of 110 CEO’s and CIO’s to compare these two concepts of IT in business performance, IT alignment is essential to help extracting benefits in various operational resources. Although we will not try to elaborate either of these perspectives they do give a clear indication that IT can add business value. Nonetheless, all aforementioned research agree on the fact that IT only adds value if it is used complementary with the organizational resources.
Prior research has indicated that absorptive capacity is another important firm
characteristic that stresses the importance of IT on business value. Absorptive capacity is the ability to identify, assimilate, transform and apply external knowledge. In order to incorporate this knowledge successfully the knowledge must be transformed into the firm’s knowledge base (Cohen & Levinthal, 1990). This capacity is dependent on the transfer of knowledge across and within subunits (Cohen & Levinthal, 1990) and successful integration generates business value. However, knowledge transformation and sharing is dependent on a strong IT platform, because IT includes the technology that makes data communication possible. A well-functioning IT platform adds value through the organization’s capacity to identify, assimilate and apply new knowledge (Gold & Malhotra, 2001). In the literature review of Roberts et al. (2012) they review prior research on absorptive capacity and IT on four different themes, namely business-IT
knowledge, IT assimilation, knowledge transfer and IT business value. They conclude that “IT business value can be derived from the synergistic effects of absorptive capacity, IT capabilities and strategy” (Roberts et al., 2012, p: 638). This is coherent with the aforementioned conclusions of the resource-based perspective and contingency-based perspective of IT business value. Again, in this thesis the influences of absorptive capacity will not be elaborated, however this topic give a clear indication that IT is a valuable resource for business operations.
9 To summarize, prior research indicate that IT seems to be an important strategic resource to add value to the organization. However, one should note that it is not a stand-alone resource. IT is a complementary resource that should be used in line with other strategic resources and this can result in value for the business. IT is a supporting business unit that is important for business operations in the role of knowledge transfer, communication and digital technology.
2.2 Corporate spin off
Research has shown that spin-offs and divestures are the most popular implementations of business restructuring (Bruner, 2004). In a divesture a company sells a division of the company to a third party. The division will become part of another firm entirely and is subject to any restructuring problems associated with such an acquisition (Berk & DeMarzo, 2007). A corporate spin-off is another way how a firm can divest a division. A spin off involves the
separation of a company’s business through the creation of one or more separate companies. This form of divesture does not sell the division to a third party but the division will become an
independent firm entirely (Krishnaswami & Subramaniam, 1999; Bergh et al., 2008).
Theoretically, a spin-off is beneficial because it results in a separation of operations and management between the two firms and ultimately both firms can focus on their own
independent operations. There has been a wide array of research conducted to identify the explanatory reasons of spin-offs. According to previous empirical literature “the main reasons can be classified as follows: (i) transfer of wealth from bondholders to shareholders, (ii) tax and regulatory advantages, (iii) restructuring of incentive contracts, (iv) improved focus and
elimination of negative synergies”. Especially the latter three classifications contribute to why a spin-off firm would perform better (Krishnaswami & Subramaniam, 1999, p: 76).The process of completing a spin-off is complex and requires consideration of a multiple of financial, capital markets, legal, tax and other factors. One can imagine that divesting a large part of a corporate business is an extensive and time consuming process. In order to make sure this process will be handled accordingly several agreements are established between the preliminary phases and completion of the transaction (Accenture, 2014; Deloitte, 2008; Du & Tanriverdi, 2010). One such agreement is a TSA, this agreement documents the transitional services that will be
10 agreement will be discussed first the business motivation for a corporate spin-off and the
information hypothesis will be elaborated.
We will not try to clarify the explanatory reasons as to why firms engage in spin-off activity but rather explain how a firm can best implement their spin off, specifically in their engagement and governance of TSA. However, both questions are relevant in the discussion of the information hypothesis. The information hypothesis explains that there exists information asymmetry between the firm and its shareholders (Bergh et al., 2008; Krishnaswami & Subramaniam, 1999). Financial reporting and disclosure are important instruments for
management to communicate firm performance and governance to external investors (Healy & Papelu, 2001). This information is key for a correct valuation of the market value of the firm and the valuation is particularly interesting if the firm wants to raise capital on the equity markets. If a firm consists of different divisions the market can only observe the aggregate cash flows of the entire firm in the financial reporting, instead of the individual divisional cash flows. This could result in misvaluation of the firm’s securities (Berk & DeMarzo, 2007; Duchin, Matsusaka & Ozbas, 2010). This valuation indicates that the capital market is not correctly informed about the real value of the firm. A corporate spin off can facilitate correct information about each separate division for the capital market. This is due to the fact that the spin-off will release more
information about the separate divisions of the firm. Hence all relevant disclosures and financial information about the division needs to be communicated to the shareholders, thus eliminating the aforementioned issue of aggregate information. But what does this imply? One needs to account for the strategic view of the firm’s management as to when engagement in a spin-off is preferable taking misvaluation into account. When a firm wants to raise external capital to finance their growth opportunities, and is overvalued by the capital markets, the firm will not engage in a spin-off because they would receive more capital if they retain their current valuation by the market. Undervalued firms however would first want to achieve fair market value for their shares by undertaking a spin-off and then issue equity to raise capital (Berk & De Marzo, 2007; Bergh et al., 2008; Krishnaswami & Subramaniam, 1999).
To summarize, a corporate spin-off gives the capital markets the ability to correctly assess the information about the division and creates focus on the individual operations and management between divisions. All information about the spin-off firm will be analyzed by investors and given this information the new firm will be valued. Thus information about the
11 transitional services incorporated in the prospectus and information statement will also be
analyzed and can signal information to the investor. This will be discussed in paragraph 2.4.2.
2.3 Transition Service Agreement
Transitional services are not widely researched in the academic literature. These services and their contracts provide an interesting period in which the principal- agent theory and contract theory can be tested empirically. First, the basic features of a TSA will be discussed. Second, the advantages and disadvantages from both parent firm and spin-off firm will be elaborated. Third, the link with IT will be made.
TSA is a legal document that outlines and governs the transitional services provided by the former parent to the spin-off firm. The spin-off firm has the challenge to develop and structure their own independent business whilst maintaining the business continuity in order to avoid any limitations in their operations. Companies typically employ TSA’s in situations where the divested entity needs time to replace corporate functions and capabilities that the parent company had previously provided. Often the spin-off firm lacks the necessary IT capabilities or capacity to support the business on its own (Deloitte, 2008; Accenture, 2014), because
developing a new IT system is not feasible in the short amount of time available. Therefore, IT is regularly provided by transitional services. IT is an essential supporting function of the
organization and should be managed accordingly in order to maintain business operations, as discussed in paragraph 2.1. TSA is a legal document that outlines and governs the services the seller will provide to the spin-off firm for a period of time after the transaction is closed. TSA are used to provide business continuity while the spin-off firm develops her own business functions or find new external providers.
Transitional services of IT are important for the spin-off firm because they help create value when investments in a new IT platform need to be deferred but TSA can also induce costs due to opportunistic behavior or shirking by the former parent firm. The most important
advantage of the TSA is the fact that it creates optionality for the spin-off firm. This optionality can help gain better insights in the IT requirements most suitable for the spin-off firm. Most suitable IT requirements are difficult to determine ex-ante. Additionally, transitional services can help postpone costly IT investments and use this capital for more pressing matters. This value created by optionality is widely discussed by McDonald and Siegel (1986). They show by means
12 of a theoretical model that value can be gained by postponing investment. An essential feature of their model is that the firm is faced with the mutually exclusive choice of taking an irreversible project today or in the future. Option thinking is critical in IT investments as the environment is often uncertain while the ex-ante investment is irreversible (Taudes, Feurstein & Mild, 2000). The ability to adapt to the environment and making investments during the process is essential in the development of a well-fit IT system. Therefore, the ability to make use of a transitional IT services in the process of developing an IT system is essential in order to limit disruption in business operations. This ability captures the value of managerial flexibility (Fichman, 2004; Dixit & Pindyck, 1994). Spin-off firms are subject to capital constraints (Bergh et al., 2008), therefore the ability to postpone IT investments can help create business value. This option give the right, but not the obligation, to obtain benefits of future deployments of the technology, just as financial call options give the right but not the obligation, to obtain the benefits from future ownership of traded securities (Fichman, 2004). It should be noted that the spin-off firm pays the service provider for their services. However, these services are charged at a very lucrative price for the spin-off firm, often simply the costs the service provider endured and sometimes with an extra management fee. Nevertheless, transitional services also induce costs that are well known in the organization economic literature. Several practitioners’ research indicate that former parent firms have no interest in providing the services to the spin-off unit. This is due to several reasons. First of all, providing services is most likely not a core business of the former parent firm. Therefore, reputation of the former parent firm plays no role, hence it is no professional service provider of IT in the first place. Reputation plays a very prominent role in the principal-agent theory and in outsourcing practices, where the service provider benefits of a good
reputation. On the contrary, the former parent firm often perceive TSA as a nuisance and distraction of their key operations (Deloitte, 2008; Accenture, 2014). Second of all, divestures can potentially increase other IT risks for the parent company if the IT disintegration is not done accordingly and the former parent firm needs to handle its own issues concerning the separation. Several risks are discussed by Tanriverdi & Du (2009, p. 2), including “Business continuity risks due to disruption of operations during the separation of previously integrated systems and
processes and information risks such as the loss of protection of data privacy and intellectual property rights due to disruption of related controls during the change management processes of divestitures”. This indicates that the parent firm logically perceive the TSA and issues with IT
13 disintegration as possibly harmful. This negative attitude of the parent firm could ultimately damage the operations of the spin-off firm in its IT functions and therefore, keeping the importance of IT in mind, be detrimental to the business operations. In order to reduce the possibility of shirking by the former parent firm the governance structure of the TSA needs to be well specified. It is important to construct well covered governance contract when engaging in an IT outsourcing service, thus TSA as well. Management control systems that govern the services provided are important, in prior research it has been shown that it is important to specify factors as monitoring provisions, dispute resolutions, property rights allocation and contingency
provisions (Anderson & Dekker, 2005; Chen & Bharadwaj, 2009; Jensen & Meckling, 1992). These factors will be discussed in chapter 3.
To summarize, although the option to make use of transitional services is beneficial for the firm they could potentially be costly through agency issues. The spin-off firm can postpone irreversible IT investments and therefore make better investments when it is needed.
Nonetheless, transitional services are vulnerable to shirking by the former parent firm and could induce agency costs, especially when taking the reputation and nuisance factors into account. Therefore careful consideration in constructing the TSA’s that govern these service is important (Deloitte, 2008; Accenture, 2014).
Figure 2.1: Schematic overview of spin-off and TSA timeline
Parent
Subsidiary #1 Subsidiary #2 Subsidiary #3
Parent
Subsidiary #1 Subsidiary #2 Spin-off
independent firm Transitional
services
Spin-off deal annouced
Deal closed and spin-off firm seperated Spin-off firm fully independent (TSA terminated) TSA planned TSA negotiated
TSA reviewed by other parties TSA finalized and released to public
Drafting phase of TSA
TSA monitored and reviewed TSA Goverend TSA coordinated TSA executed Start transitional services
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2.4 Principal-Agent theory & Contract theory
In this thesis TSA will be perceived as outsourcing contracts. Outsourcing is an ongoing relationship between a vendor and a client. Economic theories that specify the issues that arise while engaging in such a principal –agent relationship is interesting, especially in the unique environment of a corporate spin-off. Outsourcing contracts and its structure are best understood through a combination of different economic theories, namely the principal-agent theory and contract theory. In the following paragraph the different theories will be discussed.
Principal-agent theory, also known as the principal-agent problem, is an important theory in the organization economics. In order to fully comprehend the principal-agent theory one needs to keep in mind that in all standard economic theory assumes that everybody is selfish and therefore always try to maximize their own payoff. The principal-agent theory explains that in a relationship between a principal (client) and an agent (service provider) both entities will act in its own selfish perspective and will always try to maximize their own payoff despite the payoff of the other party (Alchian & Demsetz, 1972; Gibbons, 1997). This dilemma exists only if there is a conflict of interest, otherwise both entities have the same interest and would operate in favor of the payoff of both parties. Hence no conflict or costs for either party will arise. A basic example of this conflict of interest is between corporate management (agent) and shareholders (principal). Information asymmetry is a very important factor in this dilemma, if the principal can ensure that the agent is acting in the principal’s interest there would be no problem. However, due to the fact that the principal is not perfectly informed about the actions of the agent or the relevant external information the principal cannot ensure this. The principal is concerned about the possibility of being exploited by the agent and often contracts are constructed to mitigate the ability of the agent to operate in its own interest at the cost of the principal. Outsourcing contracts, including TSA’s, are designed to govern the pre-arranged services and thereby mitigate costs that arise from the principal-agent problem. This is explained by the contract theory. However, this utilizes the notion of a complete contract, which is seen as a contract that specifies all consequences of every possible state that could result from the relationship. It is however impossible, or too costly, to ex-ante include every possible
developments in a pre-designed contract. Therefore, all contracts are incomplete (Hart & Moore, 1988; Jensen & Meckling, 1992). When conflict of interest, asymmetric information and
15 This would result in more cost or less effort in the tasks the agent promised to do. The principal agent theory and contract theory implies that contracts are important governance mechanisms to ensure cooperation of the agent to the principal.
To conclude, well specified TSA and governance structure are needed to mitigate
possible agency costs in the provision of IT services endured by the spin-off firm. As previously discussed, IT is an important resource for operations of a business. In addition, a spin-off is restructuring in order to become independent while maintain their business operations. The transitional IT services should be provided consistently and at a level that could not disrupt these operations. Shirking in these key services by the former parent firm (agent) could be detrimental to the business operations and performance of the spin-off firm. A well designed governance structure that will control these promised services is very important, especially given the previously discussed perspective of the former parent firm on these transitional services.
2.5 Hypotheses
In the previous paragraphs IT business value, the corporate spin-off and transitional services governed by TSA have been discussed. In this paragraph the hypotheses will be elaborated. First, in order to construct a complete view on the ambiguous influences of transitional IT services and TSA’s on the performance of the spin-off, uncertainty concerning supporting IT services for the spin-off firm will be operationalized. After which the hypotheses and the theoretical background will be elaborated.
2.5.1 Uncertainty
Issues and concerns about the supporting functions of IT during and after the transition period of a corporate spin-off can be characterized as uncertainty regarding these functions. In a corporate spin-off the interpretation of uncertainty regarding these transitional IT services is ambiguous and can be measured in various ways. There can be uncertainty about the future performance regarding the level of independence of the spin-off firm or uncertainty regarding the transitional services itself and their influence on the operating performance. Therefore, the influence of uncertainty on the performance of the spin-off firm can be measured in different ways. First of all, uncertainty about the ability to operate independently can negatively influence the market valuation of the spin-off firm and can be measured by the stock market valuation on the first trading day. Second of all, uncertainty concerning the transitional services provided during the
16 spin-off by the parent firm can negatively influence operations, this influence can be measured in the operating performance. The TSA can be separated in two factors the (i) duration of the transitional services and (ii) the governance structure of the transition services. Both of these factors are different indicators of uncertainty concerning the supporting IT function. An
extensive governance contract and a long duration of a TSA implies certainty concerning the IT services (in respect of threat of shirking, quality and option value) provided by the former parent firm and thus positively influence the operating performance. Less uncertainty concerning IT offered by longer transitional services and better governed transitional services will positively influence the operating performance. However, longer duration of transitional services also implies uncertainty about the ability of the spin-off firm to operate independently once the transitional services expire and will signal the investors thereby negatively influencing the market valuation of the spin-off firm. From these perspectives of the influence of uncertainty on the performance of the spin-off firm the following hypotheses can be constructed:
H1: Capital markets will value a firm lower when there uncertainty concerning their ability to operate independently is high.
H2: Less uncertainty concerning the supporting IT services will positively influence the operating performance of the spin-off.
2.5.2 Hypothesis 1: Market valuation of spin-off firm
In paragraph 2.2 the information hypothesis and the corporate spin-off have been discussed. The information hypothesis predicts that management will engage in a spin-off in order to reduce the information asymmetry between firm and the capital market. The spin-off will release more information to the capital market (Bergh et al., 2008; Krishnaswami & Subramaniam, 1999).
Given the importance of IT as a strategic resource and the fact that not only financial reporting but also disclosures concerning firm performance and governance will be taken into account by the investors, the TSA will also carry information about the state of the firm (Healy & Papelu, 2001). The TSA will signal to the capital market that the spin-off firm is not yet capable to maintain their business operations independently. This signal indicates that there is uncertainty regarding the future operations of the spin-off firm once the transitional services are
17 expired. In their research on TSA in corporate spin-off valuation they have shown that longer duration of TSA will negatively affect the market valuation of the spin-off firm (Du &
Tanriverdi, 2010). They argue that longer transitional services is an indication that the spin-off firm is more dependent on the former parent firm opposed to a spin-off firm with shorter transitional services. In addition, it is shown that capital market include the IT of a firm in the valuation of the firm’s securities (Dehning, Richardson & Zmud, 2003). The empirical study of Hayes, Hunton and Reck (2000) show the outsourcing IT systems to service providers have a positive influence on the market valuation of such firm. They indicate that one important reason of this positive influence is the fact that the service provider of IT have relatively better IT structure as it is their core business. This is a key difference between the transitional services provided by the former parent firm and the outsourcing relationship with a service provider. Providing services is not a core business for the parent firm and reputation, unlike in the
aforementioned outsourcing relationship, plays no role. The study however does support the fact that outsourcing of IT influences the market valuation of the recipient, thus it can be argued that this is also the case for TSA’s. In this thesis the signal TSA carries will be perceived as an indicator of uncertainty about the ability of the spin-off firm to operate independently.
Specifically the length of the transitional IT services will an indicator of uncertainty regarding future operations and the level of independence of the spin-off firm. It is difficult for an external investor to take IT investments in the future into account, especially on the first trading day. Therefore, the capital market will not perceive the TSA as an asset that can create value by optionality due to postponing investments and the opportunity to design an appropriate IT system. Rather, they will perceive the TSA as an indicator about the uncertainty of the spin-offs future IT and business operations. After careful analysis of spin-off’s prospectus and information statement, that are provided to the investors, the governance structure of the TSA is not reported herein. However, the duration and level of services are included. Therefore, we assume that the governance structure of the TSA contracts will be less influential as a signal to the capital market valuation.
2.5.3 Hypothesis 2: Operating performance, TSA governance and spin-off firm.
The spin-off firm has the objective to avoid disruptions in their business operations while restructuring their business in order to become a fully independent firm. As indicated in
18 paragraph 2.3 transitional services can be seen as an option to defer IT investments and thereby offers the opportunity to make more appropriate IT investments. This results in the ability to design a suitable IT system that meets the emerging strategic and operational needs when they are identified (Fichman, 2004; Taudes et al., 2000). In addition, the deferred capital investments that become available gives the opportunity to invest capital in more pressing matters during the transition period. In an empirical research on 858 IT outsourcing transactions by Anderson and Dekker (2005) they show the importance of management control by means of contracts that can mitigate the costs that result from opportunistic behavior in transactions. Thereby mitigating performance problems. This is supported by another empirical study on outsourcing contracts that stresses the ability to offset any opportunism risks and thereby mitigate costs, especially
when involving core business operations (Barthelemy & Quélin, 2006). IT is a strategic
resources and very valuable on an information transfer, communication and operational level and thereby very involved and supportive with the core business (Cohen & Levinthal, 1990; Oh & Pinsonneault, 2007), as previously discussed in paragraph 2.1. Therefore, governance of outsourcing relationships is important in order to ensure correct quality and level of services needed by the recipient.
The aforementioned academic background implies that transitional IT services and corresponding TSA influence the operating performance in twofold. In respect of the value of optionality longer transitional IT services will diminish the level of uncertainty, hence the spin-off firm will have a suitable IT system available to support their operations when needed. Ultimately increasing the operating performance. In accordance with the contract theory and the principal-agent theory, more extensive TSA will better govern the transitional IT services provided by the parent firm and will therefore mitigate the uncertainty regarding these services caused by shirking or opportunistic behavior by the former parent firm. Ultimately, this is beneficial for the operating performance of the spin-off firm.
2.5.4 Influence of business restructuring, IT and operating performance of the spin-off firm.
In order to get a clear perspective on the influences that business restructuring has on the operating performance, first business restructuring needs to be defined. In this thesis the definition constructed by Du and Tanriverdi (2010) will be used namely “the extent to which a firm changes its organizational structure, industrial positioning, business processes, scale
19 workforce, geographic presence and other organizational parameters”. One can imagine that reorganizing such institutionalized factors of a firm could increase the risk of disrupting the business operations.
Spin-off firms may have problems to readjust to their independent status due to the inheritance of parent’s routines and processes. Reorganization is a necessary cost that enables firms to create their own culture and create their own procedures (Parhankangas & Arenius, 2003). However, prevalent research focus on the performance after the restructuring period has been finalized measured by the market value or performance, thereby taking the long term effects into account. Less focus has been on the restructuring period itself. There has been research that indicates that synergetic values of acquisition will take time to release and that in the short term mainly costs will be endured (Barkema & Schijven, 2008; Berk deMarzo, 2007). Similarly, a spin-off firm needs to construct culture and internal guidelines and policies for their actions in order to become established firm, this takes time (Parhankangas & Arenius, 2003). Before this level of internal organization and culture has been created a spin-off firm may be subject to transitory decline in operating performance during the restructuring. First of all, this lack of procedures and guidelines can result in inertia, inconsistent decision making and business quality (Hannan & Freeman, 1984). Second of all, resources need to be designated to
non-recurring restructuring activities opposed to business operations.
Transitional services of IT offers flexibility to the restructuring process. As previously discussed, IT transitional services offers the possibility to postpone investments while retaining the necessary IT services that support the business operations. In addition, this flexibility through option thinking relieves capital constraints. Which in turn offers the ability to focus on continuity instead on long term investments. Young firms should target their resources on short-term
benefits opposed to long term investments as has been concluded in the empirical analysis of Souder and Shaver (2010). They researched how firms differ in the pursuit of long term investments. They conclude that for specifically young firm continuity is more important than promising future investments. Broadbent, Weill and Clair (1999) show that well-functioning IT is essential during restructuring because it ensures the ability to retract information, data and basic IT functions by means of communication systems. The transitional services offered by the former parent firm ensures the ability to have access to a well-functioning IT infrastructure.
20 Implementing and designing new IT-system risks having problems and could thereby damage the business operations.
The analysis in chapter 4 will take the business restructuring into account when
evaluating the influence of the transitional IT services on the operating performance. Due to its ambiguous influence it is difficult to ex-ante construct a hypothesis. However, the influence of the restructuring costs on the operating performance and uncertainty entailed in the supporting IT functions will be considered when testing hypothesis 2.
3. Data set 3.1 Sample
In this paragraph the dataset will be discussed. The different stages in sample collection was quite extensive and consists of several different databases. For each individual firm the relevant information had to be collected, adjusted and included. In the following paragraph all relevant steps will extensively be discussed to ensure the possibility to conduct a replication study.
The Thomson ONE database was used to collect all spin-offs conducted in the period of 1999 to 2012. However, it should be noted that not all spin-off firms are suitable for our analysis. Therefore, certain criteria were constructed that would ensure the basic framework of this
research. In total four criteria were used to filter the search, namely ‘Status’, ‘United States’, ‘Publicly traded’ and ‘Distribution’. ‘Status’ is the criteria that ensures that the spin-off is completed in the period of interest. Often spin-offs are announced but ultimately not completed. Logically, only firms that successfully completed the spin-off are of interest for the analyses. ‘United States’ ensures that only spin-offs that are conducted in the United States of America (USA) are selected. This is essential because the Security Exchange Commission’s Edgar
database (SEC’s Edgar Database) is used to collect the TSA’s. This database only includes firms that are registered in the USA. ‘Publicly traded’ ensures that all the selected spin-off firms are publicly traded. This is crucial for the analyses as this criteria ensures that all the required financial data is accessible for research. ‘Distribution’ ensures that 100% of the shares of the spin-off firm are distributed among shareholders. This criteria ensures that the former parent firm does not have any ownership in the spin-off firm. Otherwise, this could influence the attitude in the business relationship of the former parent firm in the transition period and this would contradict the economic theories that are being tested in this research. The former parent firm would benefit from the performance of the spin-off firm, thus the interest would be aligned.
21 Including these four criteria in our selection of the Thomson ONE database resulted in an initial sample of 210 completed spin-offs.
In order to further filter the initial sample of 210 spin-offs the COMPUSTAT database and CRSP database has been used. All firms in the sample that are not registered in this database are excluded from the sample. This resulted in a sample of 98 firms.
However this sample had to be corrected for firms that did not have the relevant data on the variables that were to be analyzed. Very important is the presence of the TSA of the spin-off. The SEC’s Edgar Database is used in order to collect the TSA’s. In order to collect the TSA’s the SEC fillings of the 98 firms had to be searched, collected and skimmed by hand. The SEC filings (fillings 10K, 8K, 10A12B and S-1) filed around the date of completion for the spin-off firms and the SEC filings of the parent firms filed around the announcement date of the spin off were analyzed for the presence of TSA’s. All the firms that did not include a TSA in these filings had to be excluded. Not only the presence of TSA is sufficient, also the TSA need to specify that they provide transition services for IT. If they do not specify IT service they are also excluded of the sample. This resulted in a sample of 76 firms.
After careful consideration 11 other firms had to be excluded. Some of them indicated that directly after the spin-off they would be acquired by, acquire or merge another firm. This would bias the results and therefore they are also excluded.
In table 3.1 an overview is given of which data is collected in which database.
3.2 Independent variables
Framework of governance structure of TSA
Table 3.1: Overview datasource.
Assets - Total (Spin-off & Parent) Preferred stock liquidating value
Current Assets Restructuring cost - pretax
EBITDA Long term debt - total
Inventories - Total Reveneu (spin-off & Parent)
Current Liabilities
SEC's Edgar database
closing price stock first day total number of shares outstanding
TSA filings THOMSON ONE
CRSP
Spin-off firms Date announcement spin-off
Date completed spin-off
22 The theoretical background on contract structure is provided by Jensen and Meckling (1992). They describe that contracts are systems to enforce management control and therefore govern the performance of the contracts. There are only a few studies that provide ways of analyzing IT contracts. In an empirical study on the structure of IT contracts (Anderson & Dekker, 2005) they identified four dimensions of interest when assessing the quality of management control namely assignment of rights, product and price terms, after sales service terms and terms of legal
recourse. The authors shown in their study that the existence of these four dimensions in the management control contracts mitigate the endured transaction costs endured when purchasing IT. It should be noted that a purchasing contract is significantly different from an outsourcing contract. Chen and Bharadwaj (2009) used the aforementioned study to develop a comprehensive understanding of contract structures used in IT outsourcing context. They used a framework of four dimensions that represents distinct governance choices. Each choice relating to the
theoretical background provided by Jensen & Meckling (1992) and resulted in monitoring provisions, dispute resolution, property rights allocation/protection and contingency provisions. The coding framework consists of four dimensions each consisting of several clauses that indicate how extensive the governance level of that dimension is. Each dimension will be discussed in turn.
Monitoring provision resembles the performance measurement dimension and provides the ability to govern and observe the performance of the service provider. This helps ensure the successful enforcement of the contract and the quality of the services and helps reduce risk by designing measures to control the operations of the services that needs to be provided. Therefore 7 clauses that measure the extent of monitoring provisions in the contract are specified in table 7.1 in the Appendix.
Dispute resolutions give guidance to underperformance and non-compliance of the service provider. They specify how to establish an accordance when disputes arise. These are important for the ongoing of the services. If the disputes would not be resolved, likely the services would stop as well. Therefore 3 clauses that measure the extent of dispute resolutions are specified in table 7.1 in the Appendix.
Property rights in the outsourcing contract specifies information exchange and property sharing between service provider and client. This indicates the assignment of ownership and rights to use property and the provision of security and confidentiality of the information
23 processed. Three clauses cover this dimension and these are specified in table 7.1 in the
Appendix.
Contingency provisions indicate the ability to reevaluate the outsourcing conditions. Hence as the future developments are uncertain it is valuable to have a certain degree of
flexibility in the contract. Three clauses cover this dimension and these are specified in table 7.1 in the Appendix.
After the analysis of three detailed TSA contracts in our sample the aforementioned coding framework proved comprehensive. Next to this, I have consulted with a law practitioner of Deloitte, someone who has actually drafted various TSA’s, in order to verify whether the clauses in table 7.1 are a comprehensive textual analysis of the governance structure. This framework of the governance structure of the TSA has been validated by this law practitioner. In table 7.1 in the Appendix the dimensions and corresponding clauses are specified.
The four dimensions of contractual provisions yields the measure of contract
extensiveness (Anderson & Dekker, 2005) for IT outsourcing contracts. The aforementioned framework of the contract structure has been used to carefully code each TSA. Each TSA was analyzed and the clauses that are present identified. Each clause has been coded simply as present or absent, this keeps the task simple and straightforward. This means that the expected values of the dimension monitoring provision can range from 0 to 7. When a TSA has minimum monitoring provision it has a value of 0, likewise when a TSA has a maximum monitoring provision is has a value of 1. The ranges of the dimensions dispute resolution, property rights protection and contingency provision are 0 to 3. Text examples of clauses that were present in TSA’s are included in table 7.1. These examples indicate when the clauses were identified as present, if similar specifications were not included in a TSA the clause would be coded as absent. In order to make sure the coding was preformed consistently the first 20 coded TSA have been coded a second time. The correlation between the first and second time was 93.37%. This indicates the coding has been done consistently. Ultimately, the extensiveness of the governance structure has been computed by weighing each dimension equally and taking the sum of them. This resulted in an expected value of the extensiveness of the contract that can range from 0 to 4 indicating a least extensive contract when valued 0 and most extensive contract when valued 4 for each contract.
24 Duration of transitional IT services
Next to the contract extensiveness also the duration of the transitional services will be coded. The duration of the TSA contract is measured as the amount of months the parent firm is committed to provide the IT services to the spin-off firm. These are reported in the information statements and TSA fillings.
The coding procedure for the duration of transitional IT services had to be done carefully and consistently. In order to do this successfully the exact duration of the service term had to be identified in each TSA. This is specified under ‘Service Term’ in the TSA. Herein the duration of the TSA is specifically included. For instance in the TSA of Duke Energy the service term is specified simply as ”January 1, 2007 – December 31, 2007”. In the TSA of DSP Group it is specified as follows “The term of the transition services agreement governs the provision commenced on the date of the separation agreement and continues until December 31, 2003”. The duration of transitional IT services has been coded by computing the amount of months between the begin date and the end date of the transitional services as stated in the service term of the TSA.
Business restructuring intensity
Business restructuring intensity is measured as the ratio of the restructuring costs to the revenue of the spin-off firm within two years period after the spin-off. Restructuring costs is retrieved from the COMPUSTAT database as restructuring costs pretax. This item is widely used in literature to measure a firm’s restructuring costs (Doyle & McVay, 2007).
Transaction volume
Transaction volume can be of influence in this analysis. Hence one can assume that a larger deal tend to have different transitional IT services than a small deal. Transaction volume is computed as the ratio of the revenue of the spin-off firm divided by the revenue of the parent firm in the most recent fiscal year before the spin-off.
Relatedness
Relatedness between the industries that both the parent and the spin-off firm operates in proved to be an important factor in previous literature about divesture (Bergh et al., 2008). Following
25 this article, relatedness was measured by means of a dummy variable that would be valued 1 if firms are operating in the same industry, determined by the two digit SIC-codes.
Reciprocity
Some spin-off firms also provide transition services to the former parent firm. In the economic literature there has been a lot of evidence that reciprocity is relevant in relations between firms/ people (Fehr, Kirchsteiger and Riedl, 1998). It is important to control for this factor. Reciprocity variable is computed as a dummy variable, valued 1 if the spin-off firm also offers transition services to the parent firm and valued 0 if not.
SOX exposure
The Sarbanes-Oxley act (SOX) increased the regulations concerning internal controls for public firms in the USA. This act has been implemented in 2002 after numerous audit scandals came to light. Although control on IT is not the primary objective of the act, the act does have significant influences on the attitude of both parent firm and spin-off firm on the transitional IT services. IT plays an important role in internal audit and disruptions of internal IT control could ultimately result in incompliance with SOX (Tanriverdi & Du, 2009). Therefore a dummy variable was computed in order to control for the SOX. The dummy variable takes value 1 if the spin-off deal was closed in or after 2004, and otherwise 0.
Regulated Industry
If an industry is strictly regulated this can have influence in determining the arrangement in the spin-off deal. Therefore a dummy variable was created for firms that operate in one of the regulated industries in the USA. The dummy variable takes value 1 if the spin-off firm operates in the sector utility, transportation and finance. This is equal to the NAICS sector code 22, 48 and 49 or 52 respectively. . In our sample only one spin-off satisfied this dummy variable. In the analyses of chapter 4 this variable has been omitted because a dummy variable with just one observation will influence the regression models.
26 Characteristics of the spin-off firm can strongly influence the dependent variables. Both the size and the profitability of the spin-off firm can influence the capital market valuation, financial performance and the agreement regarding the transitional services. In order to correctly analyze the hypotheses the characteristics size and profitability of the spin off-firm need to be accounted for.
Size
Size of the spin-off firm has been computed by taking the logarithm of the total assets at the end of the most recent fiscal year before the spin-off.
Profitability
Profitability of the spin-off firm has been computed by taking its ROA at the most recent fiscal year before the spin-off. Profitability of the spin-off before the separation can influence the market valuation or the improvement of the operating performance.
Business cycle
Business cycles strongly influence the future performance and capital market valuation of a firm. Hence every firm is dependent on the economy to successfully operate in the market. In this thesis the economic cycles were determined by computing the average of the period 1999 – 2012 of the S&P 500 index. A dummy variable was constructed that valued 1 if the average in the year when the spin-off is completed is below this average, otherwise 0.
Industry
In order to control for the industry the spin-off firm operates the industry is defined based on the 2 digit SIC code. Four dummy variables have been computed that control for the industries namely manufacturing industry, service industry, financial industry and other. Other combines the industries that did not have enough observation to be an independent dummy variable.
3.3 Dependent variables
27 Market valuation captures the value investors on the capital market presume for the shares of a firm. When a new firm enters the capital market, e.g. IPO or spin-off, the investors will value the firm on the basis of its future growth potential. In order to make a proper assumptions about future values investors will evaluate all the relevant information that is made public, these includes the prospectus, security registration form and other forms that discloses information about the spin-off. Tobin’s Q is a widely accepted measure for the market value of the firm and is computed with the data collected from COMPUSTAT and CRSP (Berk & DeMarzo, 2007; Chung & Pruitt, 1994). MV is the market value of the firm computed by multiplying the share price on first trading day with the amount of shares outstanding on the first trading day. PS is the liquidating value of preferred stock. TA is the book value of the total assets.
𝑇𝑜𝑏𝑖𝑛′𝑠 𝑄 = (𝑀𝑉 + 𝑃𝑆 + 𝐷𝐸𝐵𝑇)/𝑇𝐴
Current liabilities, current assets and long term debt are all book values and collected from COMPUSTAT.
𝐷𝐸𝐵𝑇 = 𝑐𝑢𝑟𝑟𝑒𝑛𝑡_𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑒𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡_𝑎𝑠𝑠𝑒𝑡𝑠 + 𝑙𝑜𝑛𝑔_𝑡𝑒𝑟𝑚_𝑑𝑒𝑏𝑡
Operating performance
Operating performance is a financial measure that is widely used in economic, financial and accounting literature (Bergh, 1995). How specifications of TSA influences the operating performance after the spin-off will be assessed in this thesis. In order to give a proper indication to how the operating performance fluctuated between before and after the spin-off the
improvement of return on assets (ROA) has been computed. This is done by dividing the
EBITDA by its total asset. Improvement of the ROA is determined by computing the difference between ROA in two years after the spin-off in comparison with the ROA in the year before the spin-off. However, one need to correctly compare the fiscal years end date for each company.
3.5 Model
Our model will be tested by means of regression models. The equation with closing time of deal will be estimated by multiple Ordinary Least Square (OLS) regression models. The equation with Tobin’s Q will be estimated by multiple Two-Stage-Least Square (TSLS) regression models
28 to account for possible endogeneity due to the earlier stage in the spin-off timeline (figure 2.1) of the variable closing time of the deal (Stock & Watson, 2003). The equation with
ROA-improvement will be estimated by multiple OLS regression models. We do not believe that the Tobin’s Q will be endogenous to the ROA improvement, this will be verified in an analysis. However, theory would expect that market valuation will have no effect on the operating
performance of a firm. During the estimations of the various regression models of equation 3, the possible influence of the interaction term between duration and restructuring intensity and a possible nonlinear influence of duration will be accounted for as well.
Equation 1: 𝑐𝑙𝑜𝑠𝑖𝑛𝑔_𝑡𝑖𝑚𝑒_𝑑𝑒𝑎𝑙 = 𝛽0+ 𝛽1(𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑇𝑆𝐴) + 𝛽2(𝑇𝑆𝐴_𝑒𝑥𝑡𝑒𝑛𝑠𝑖𝑣𝑒𝑛𝑒𝑠𝑠) + Σ𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀 Equation 2: 𝑇𝑜𝑏𝑖𝑛′𝑠 𝑄 = 𝛾0+ 𝛾1(𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑇𝑆𝐴) + 𝛾2(𝑇𝑆𝐴 𝑒𝑥𝑡𝑒𝑛𝑠𝑖𝑣𝑒𝑛𝑒𝑠𝑠) + 𝛾3(𝑐𝑙𝑜𝑠𝑖𝑛𝑔_𝑡𝑖𝑚𝑒_𝑑𝑒𝑎𝑙) + Σ𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀 Equation 3: 𝑅𝑂𝐴_𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 = 𝜂0+ 𝜂1(𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑇𝑆𝐴) + 𝜂2(𝑇𝑆𝐴_𝑒𝑥𝑡𝑒𝑛𝑠𝑖𝑣𝑒𝑛𝑒𝑠𝑠) +𝜂3(𝑅𝑒𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦) + Σ𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀 4. Results
In this chapter the results will be discussed in detail. First, the tests for outliers and
heteroscedasticity will be discussed. Second, the descriptive statistics will be examined. Third, the key implications of the pairwise Pearson correlation matrix will be discussed. Fourth, several regression models will be examined and elaborated. During this chapter the results will indicate if the hypotheses are verified or rejected. For a clear view of the results several tables have been included.
4.1 Standardization, outliers and heteroscedasticity
In order to give a more consistent estimation of the results all variables except the dummy
variables are standardized. This makes it easier to compare results as we can assess the results by the standard deviations.
Before the regressions were computed possible outliers needed to be identified and excluded from our sample. Identification of the outliers was possible through scatterplots of the standardized values of each individual independent variable and each individual dependent
29 variables. Observations that were plus three or minus three standard deviations of the mean had to be investigated more closely in order to determine if they would bias the regressions. By careful investigation of how exclusion of each of these observations in the regression would influence the effects of the regressors, outliers could be identified. In this thesis several outliers of the key variables have been excluded, because the aforementioned investigation pointed out that these would severely influence the coefficients. In table 4.1 an overview is given of how many observations are excluded when analyzing this set of variables.
In order to determine whether the residuals are homoscedastic a statistical test was computed. The Cameron & Triverdi’s IM-test was used in order to verify or reject the
assumption of homoscedastic residuals. In each separate regression the test for heterogeneity was not verified. Therefore, no adjustments of the standard errors or robustness analyses are needed and homoscedastic residuals can be used
Figure 4.1: Schematic overview of spin-off and TSA timeline
-2 -1 0 1 2 St a n d a rd ize d va lu e s o f ( ti me to cl o se d e a l ) -2 -1 0 1 2
Standardized values of (Extensivenesscontract)
-2 0 2 4 6 St a n d a rd ize d va lu e s o f (T o b in sQ ) -2 0 2 4 6
Standardized values of ( Months )
-6 -4 -2 0 2 St a n d a rd ize d va lu e s o f ( R O Ai mp ro ve me n t ) -2 -1 0 1 2
Standardized values of (Extensivenesscontract)
-2 -1 0 1 2 St a n d a rd ize d va lu e s o f ( ti me to cl o se d e a l ) -2 0 2 4 6
30
4.2 Descriptive statistics.
In order to give a clear indication of the results, first a summary of the descriptive statistics will be given. In this analysis our independent variables are extensiveness of TSA and the duration of transitional IT services. The descriptive statistics about the number of observations, average and standard deviation are reported in table 4.2.
Extensiveness of the TSA measures the extensiveness of the governance structure of the transitional IT services, higher score on the extensiveness of the TSA means that the governance structure incorporates more clauses that are relevant in an outsourcing relationship. The average of the extensiveness of the TSA indicates that slightly more than half of the clauses are included in the TSA of the sample (M=2.30; SD=0.773).
The duration of transitional IT services measures the amount of months the former parent firm provides transitional IT services to the spin-off firm. On average transitional IT services are provided by the former parent firm for 16 months after the distribution date of the spin-off (M = 16.33; SD =8.449). -2 0 2 4 6 St a n d a rd ize d va lu e s o f (T o b in sQ ) -2 -1 0 1 2
Standardized values of (Extensivenesscontract)
-6 -4 -2 0 2 St a n d a rd ize d va lu e s o f ( R O Ai mp ro ve me n t ) -2 0 2 4 6
Standardized values of ( Months )
Variables # excluded obs % of total obs
Duration of IT transitional services 0 0,00%
Extensiveness of contract 0 0,00%
Tobin's Q 3 4.62%
ROA-improvement 1 1.53%
Restructuring intensity 1 3,23%
31 The restructuring intensity also plays an important role in our analysis. In our sample only 31 firms reported their restructuring costs. On average the restructuring intensity of the spin-off firm is about 6% of the sales of the spin-off firm (M= .062; SD=.131).
Our dependent variables that measure the financial performance of the spin-off firm are Tobin’s Q and the operating performance. The Tobin’s Q is a measure of the firm’s market value in relation to the firm’s assets. A firm with a Tobin’s Q of higher than 1 is overvalued, while a firm with a Tobin’s Q of lower than 1 is undervalued. In our sample the spin-off firms are, on average, slightly overvalued (M= 1.22; SD= 1,015). The operating performance is measured by the improvement of the ROA of the spin-off firms. The operating performance of spin-off firms seem to deteriorate slightly, on average, in our sample (M= -0.02; SD =.091). Another dependent variable that is of interest in our analysis is the time between the spin-off announcement and the separation date of the off, this is measured by the closing time of deal. On average a spin-off takes 221 days from the announcement date to the separation date (M=218.48; SD=113.464).
4.2 Pairwise Pearson correlation coefficients
In table 4.1 the pairwise Pearson correlation coefficients of all the dependent, independent and control variables are summarized. In the following paragraph important correlations between the key variables will be discussed.
The closing time of the deal seems to be positively correlated with the extensiveness of the governance structure of the TSA (r = .428, p <.001). This is logical as a more extensive contract will most likely increase the time needed to develop, negotiate, review and finalize the TSA and therefore increase the closing time of the deal. Size of the spin-off firm and the size of the parent firm seem to be relevant as well. In addition, the closing time of the deal does not seem to be correlated with the duration of IT transitional services (r=.310; p=.814).
The Tobin’s Q of the spin-off firm does not seem to be correlated with the duration of the transitional IT services (r = -.057, p =.820). This is contradictive to our hypothesis, however the regression in the latter part of this chapter might prove different. The extensiveness of the TSA does not seem to correlate with the Tobin’s Q. This is in accordance with our expectations as the governance structure is not included in the information statement or prospectus of the spin-off. The profitability before the spin-off seem to be positively related with the market valuation by
32 investors. This is logical as investors will likely depend their investment on past performance of the spin-off firm (r = .262, p =.044).
The improvement of the ROA of the spin-off firm does not correlate with any of the variables. This is surprising and contradicts our hypotheses. This could be the first indication that more certainty regarding the provision of transitional services, either by optionality through longer IT services of the parent firm (r=-.137, p=.174) or better governance concerning the transitional IT services (r = -.002, p =.859) does not seem to influence the operating performance of the firm. In addition, it is also surprising that there is no correlation between the restructuring intensity and the improvement of ROA (r = -.205, p =.269). The regressions in the latter
paragraphs of this chapter might help to gain better insight in this initial result.
4.3 Regression models
In the previous paragraph only single correlations between the variables have been reported. In order to give a correct assessment about the influences of the independent variables on the dependent variable the model needs to account for the influences of other variables. This can be made possible by means of a multiple regression model. In our model several multiple
regressions have been used in order to analyze the influences of each independent variable on the dependent variables. However, due to the timeline aspect of the corporate spin-off our analysis also accounts for endogeneity by means of a two-stage-least squares multiple regression model where needed. In the following paragraphs the influences of the extensiveness of TSA and the duration of transitional IT services will be discussed in the same order to which a spin-off is dependent in their separation timeline, figure 2.1. First of all, the relationship between the independent variables and the closing time of the deal will be explained. Second of all, the relationship between the independent variables and the market valuation will be discussed. Lastly, the relationship between the independent variables and the operating profit will be explained.
