Former parents and their spun-off’s performance: Do board characteristics matter?

Former parents and their spun-off’s performance: Do board

characteristics matter?

Master Thesis Accountancy & Controlling

Name: Robin Zijlstra

Student number: S2850125

Supervisor: Simona Rusanescu

Date: 20-06-2020

Abstract A growing number of companies started to downsize by spinning off a business unit to enhance the performance of both the parent and the spun-off. This study aims to examine whether parent’s board gender diversity and board size at the moment of the spin-off process have a relationship with future spun-off performance. Since the parent’s board plays an essential role during the spin-off process, its characteristics could impact the effectiveness of the decision-making in this area. Based on agency theory and resource dependence theory, I hypothesize that both parent’s board gender diversity and board size improve the ability of the parent’s board to fulfill its monitoring and advisory functions. Therefore, they will also be able to perform their spinoff-related tasks better. This should lead to a better starting position and enhanced future performance of the spun-off. In this paper, I find a significant positive effect of parents’ board size on spun-off performance (Tobin’s Q) for my sample of 210 cases of listed firms in the United States. This suggests that when the board of the former parent is larger, the spun-off attains a better starting position, which leads to enhanced future performance. Parent’s board gender diversity does not have an impact on spun-off performance.

Keywords: Board of Directors, Board Gender Diversity, Board Size, Board Composition, Spin-off, Spun-off Performance

1. Introduction

On the 7th of May 2015, the shareholders of Philips voted in favor of a spin-off of its lighting

division (NRC, 2015). It was a remarkable change in the history of Philips. The company was founded in 1891 and mainly focused on the production of light bulbs. Nowadays, the business activities of Philips look significantly different. Currently, most of its turnover is realized by the Healthcare and Consumer Lifestyle divisions (NRC, 2015). According to the CEO of Philips, Frans van Houten, people should not be sentimental about heritage, but should consider the benefits of spin-offs. Firstly, a spin-off enables both companies to make investments that are necessary to realize growth in their industry (NRC, 2015). Besides, it allows companies to make decisions faster. Finally, it enables the lighting division to respond better to the changing industry, in which the focus changed from individual products to systems and services (NU.nl, 2014). Recently, Philips lighting became the market leader in the lighting sector (GlobeNewswire, 2020). Thus, Philips’ spin-off improved its ability to respond to innovations in the market and led to enhanced spun-off performance.

Philips is one of the many existing examples of fulfilled spin-offs in the last two decades. A growing number of companies started to downsize by spinning off a business unit (Choi, 2014). They choose this type of divestiture in order to maximize firm performance of the parent company. Spin-off literature provides various arguments regarding increased firm value and firm performance. One of the suggested explanations is the reduction of information asymmetry. Krishnaswami and Subramaniam (1999) found that CEOs of firms involved in spin-offs claim that the spin-off increases the market value because investors perceive the separate companies’ value more clearly. They argue that as separate entities, the consequence of a temporary decline in one entity’s performance does not spill over and adversely affect the other. Because of the above, spin-offs lead to abnormally positive performance on the long-term (Cusatis et al., 1993). Another explanation for increased firm value and performance is a decrease in diversification. From an agency theory perspective, CEOs can achieve private benefits by diversifying the firm (Aggarwal and Samwick, 2003). For instance, diversification reduces risk associated with managerial human capital (Amihud and Lev, 1981). Diversification comes at the expense of the shareholders because diversified firms are usually sold at a discount relative to focused firms (Denis, Denis and Yost, 2002; Lins and Servaes, 1999).

With the reduction in information asymmetry and decreased diversification, literature already offers explanations for enhanced performance of the pre-spinoff parent1. However, no studies

investigated spun-off performance. There might be factors that lead to significantly increased future financial performance of the spun-off entity. A possible determinant could be the board characteristics of the pre-spinoff parent. The parent’s board plays a crucial role in the divesture decision since they approve the spin-off decision. Besides, literature in the area of firm performance often link it to different board characteristics (Adams et al., 2010). Literate often refers to board gender diversity, board size, board independence, the number of board meetings, and board meeting attendance as determinants for enhanced firm performance. When a firm succeeds in composing a board that works well together, the firm’s operations will run more smoothly, and the board will make better decisions. This is beneficial in the long term, resulting in enhanced future firm performance. Therefore, this study aims to examine whether there is a relationship between pre-spinoff parent’s board characteristics and firm performance of spun-off corporations. I specifically investigate the pre-spinoff parent’s board characteristics: board gender diversity and board size. My study aims to answer the following research question:

What is the relationship between board gender diversity and board size of pre-spinoff parent companies on firm performance of spun-off entities?

Corporate board of directors plays an essential role in the corporate governance of modern companies, and an enlarged understanding of their relationship with firm performance is required for corporate governance purposes (Guest, 2009). Logically, there is an extensive amount of literature regarding the relationship between board characteristics and firm performance (Adams et al., 2010). However, within spin-off literature, there are no scientific papers that investigated the relationship between board characteristics of parent companies and spun-off performance, while the board of directors of the parent company plays an important role in the process of spinning-off a business-unit. The parent’s board of directors have a vital role within the off process. For instance, the parent company board has to approve a spin-off decision (Wachtell et al., 2016). Besides, the parent’s board has to approve all spin-spin-off related agreements, pre-spin-off internal reorganization transactions and other legal documentation, they appoint the initial board of directors and senior management of the spun-off entity and declare a dividend of the spun-spun-off to the stockholders of the parent company

1 To minimize repetition, I will use the term ‘parent’ instead of ‘pre-spinoff parent’ in the remainder of this

(Gibson Dunn, 2018). These decisions contribute to the eventual performance of the spun-off entity. For instance, when the parent’s board approves internal reorganization documentation. This decision determines the design of the spun-off. If it is not designed in the best possible way, the future performance will not be optimal.

There is a large amount of literature investigating the relationship between board gender diversity and firm performance. These papers found that women are higher educated and attend different schools compared to their male colleagues (Singh et al., 2008). Women are also better prepared for meetings. When they attend meetings, they are more active (Konrad et al., 2008). Besides, women have different inborn characteristics. They tend to be more sensitive to risk, more likely to adopt long-term strategies, and propose less aggressive and more sustainable strategies compared to male directors (Apesteguia et al., 2012; Byrnes et al., 1999; Croson and Gneezy, 2009; Eckel and Grossman, 2002, 2008; Niederle and Vesterlund, 2007; Post and Byron, 2015). However, boards do not always take advantage of being more diverse. According to Ahern and Dittmar (2012), female directors are generally younger and have less CEO experience. Moreover, they found that women tend to be more employed as non-executive managers. For these reasons, female directors are not always taken seriously by their male colleagues. Consequently, female directors do not always feel treated as full members of a board, resulting in deteriorated communication and decision-making (Groysberg and Bell, 2013). This could lead to tensions within the board of directors.

Research also focused on the relationship between board size and firm performance. The two main theories used in this area of research are agency and resource dependence theory. From an agency perspective, a board of directors with a higher number of directors retains an improved ability to monitor the management, because more directors can safeguard the interests of the shareholders (Arosa, 2013). Thus, the monitoring function should be better when a board is larger. Resource dependence theory argues that a higher number of directors features more available resources (Arosa, 2013). Hence, a larger board provides the managers of a company with more resources. According to Arosa (2013), the effective fulfillment of the monitoring and advisory functions improves the quality of strategic decision-making, which ultimately results in enhanced firm performance. The paper of Larmou and Vafeas (2010) confirms the argument that smaller firms can make a performance gain by adding one director to the board. However, there might be a point at which the benefits are outweighed through poor communication and decision-making (Cheng, 2008). It becomes harder to arrange board meetings, reach consensus and make decisions (Jensen, 1993). Also, board cohesiveness decreases since the probability that board members share the same opinion is smaller (Lipton

and Lorsch, 1992). Besides, Singh and Davidson (2003) found that larger boards are associated with less efficient use of their assets as measured by the asset-turnover ratio.

Agency theory and research dependence theory are the theoretical frameworks that researchers most frequently use in finance and economics to understand the relationship between board characteristics and firm value (Carter et al., 2003). Therefore, I will use both the agency theory and resource dependence theory to develop the hypotheses for the relationship between parent’s board characteristics and spun-off performance.

I propose that parent’s board gender diversity has a positive influence on spun-off performance. The parent’s board has to serve the interests of the shareholders (Guest, 2009). This phenomenon is called monitoring and is linked to the agency theory. Shareholders of the parent company will also be the shareholders of the spun-off when the spin-off is completed. Therefore, the shareholders benefit when the spin-off leads to a good performing spun-off entity. Higher gender diversity leads to more different viewpoints among board members (Farrell and Hersch, 2005). This enables the parent’s board to fulfil the monitoring function better (Kumar and Singh, 2013; Fama, 1980; Mizruchi, 1983; Zahra & Pearce, 1989). This will also have an impact during the spin-off process. The parent’s board will have a better ability to align the spin-off agreements with the shareholders’ interests. This will result in spin-off documentation that is more favorable for the shareholders and leads to a better starting position and enhanced future performance for the spun-off. The parent’s board also has the task of providing resources to the managers of the parent company (Hillman et al., 2000). Providing resources is linked to the resource dependence theory. When a board is more gender-diverse, the advice and resources will be more diverse and complete, since it comes from a broader perspective (Arosa, 2013). The parent’s board also provides the parent’s managers with advice during the spin-off process. The managers of the parent use this information to generate agreements, transactions, and other documentation (Gibson Dunn, 2018) that will be more beneficial for the spun-off. Therefore, a more gender-diverse board can complete a spin-off in a way that will be more beneficial than a board without gender diversity. This leads to enhanced future spun-off performance.

Regarding the relationship between the parent’s board size and performance of the spun-off, I also expect to find a positive relationship. From an agency perspective, adding an extra board member to the board would increase the ability of the board to align the interest of the shareholders and managers of the parent (Kumar and Singh, 2013). With regard to spin-offs, this enables the managers of the parent to produce spin-off agreements and documentation that are more beneficial for the parent’s shareholders. The parent’s shareholders will also become

shareholders of the spun-off (Gibson Dunn, 2018), so they benefit from spin-off agreements and documentation of good quality. This enables the parent’s managers to make better spin-off agreements and contributes to a better starting position for the spun-off. Thus, a larger parent’s board size results in more enhanced spun-off performance compared to a smaller parent’s board. According to resource dependence theory, adding an extra board member to the board increases the amount of available resources (Arosa, 2013). This enables the board of directors to provide the company’s managers with advice from a broader perspective (Arosa, 2013). Concerning spin-offs, a larger parent’s board can provide the managers with a more complete advice on the spin-off documentation than a smaller parent’s board. This results in more beneficial agreements and enhanced future performance for the spun-off.

This research focuses, with a sample of 210 cases, on 45 spin-offs of listed firms in the United States. I use SDC Platinum to gather data about these spin-offs. For each spin-off, I look at the performance (Tobin’s Q) of the first five years after it is completed. The financial data needed for this measure is gathered from CompuStat North America. Board characteristics data is collected from the BoardEx database. The first board characteristic, board gender diversity, is measured by the Blau-index of diversity. Board size is measured by the number of total board members.

Based on the ordinary least squares (OLS) regression model with industry and year-fixed effects, I find that parent’s board gender diversity does not have a relation with future spun-off performance. A possible explanation for this result is that female directors tend to be in less powerful positions (Dalton et al., 2006; Peterson and Philpot, 2007; Zelechowski and Bilimoria, 2004). If women do not serve as chair of a committee, their influence on a board might be limited. This results in women sending a weaker signal to the rest of the board (Miller and del Carmen Triana, 2009). Their influence on performance could be reduced by sending this weaker signal. Another possible explanation is the critical mass theory of Joecks et al. (2013). This theory argues that a small proportion of women on a board does not lead to enhanced firm performance. However, when a critical mass around 30 percent is reached, this relationship becomes positive. This might apply to spun-off performance as well. In my sample, the percentage of women had an average of 10 percent. This would clarify my results. Parent’s board size has a significant positive effect on spun-off performance. Therefore, only my second hypothesis is supported. This result is in line with the papers of Hidayat and Utama (2016) and Larmou and Vafeas (2010). They find the same significant positive link between board size and firm performance in stand-alone firms. My paper implies that the results of their

papers also hold when parent’s board size is related to spun-off performance, instead of stand-alone firms.

This study makes two contributions to the literature on the consequences of board characteristics, for which I use board gender diversity and board size. Moreover, I make one contribution to spin-off literature. The first board characteristic I investigate is board gender diversity. An extensive amount of research links board gender diversity to firm performance with mixed results (Li and Chen, 2018). Some studies found a positive relationship (Arun et al., 2015; Campbell and Mínguez-Vera, 2008; Carter et al., 2003; Kim and Starks, 2016; Reguera-Alvarado et al., 2015; Sabatier, 2015). In contrast, some studies did not find a causal relationship (Carter et al., 2010; Wang and Clift, 2009) and studies that found a negative link (Adams and Ferreira, 2009; Ahern and Dittmar, 2012; Terjesen et al., 2016). There are no papers linking parent’s board gender diversity to the future performance of their spun-off entities. This is surprising considering the crucial role of the parent’s board in the divesture decision. I fill the gap in the literature by linking board gender diversity to firm performance of spun-off entities.

Second, I contribute to the literature of board size by linking it to spun-offs. Most of the existing literature investigates the influence of board size on firm performance (Guest, 2009; Larmou and Vafeas, 2010). The findings of academic literature regarding the relation are mixed. Some papers find a significant negative relationship (Guest, 2009; Bennedsen et al., 2008; Nakano and Nguyen, 2013; Mak and Kusnadi, 2005), others find a significant positive relationship (Larmou and Vafeas, 2010; Kiel and Nicholson, 2003; Pham et al., 2011; Henry, 2008). Until now, no papers investigated the link between parent’s board size and performance of the spun-off. This is surprising considering the crucial role of the parent’s board in the divesture decision. In this paper, I fill the gap in the literature by linking board size to spun-off performance.

Finally, I contribute to the literature of spin-offs by investigating the determinants for spun-off performance through the parent’s board characteristics. Insofar, some papers linked a reduction of information asymmetry to the post-spinoff performance of the parent (Cusatis et al., 1993; Krishnaswami and Subramaniam, 1999). Moreover, researchers found that a decrease in diversification leads to enhanced post-spinoff performance for the parent as well (Denis, Denis and Yost, 2002; Lins and Servaes, 1999). However, the parent company’s managers make many decisions that influence the eventual performance of the spun-off. For instance, they assign assets and liabilities, decide which personnel will be transferred, and make decisions about continuing supply, intellectual property sharing, and other commercial or operating

agreements (Wachtell et al., 2016). The board of the parent company approves the agreements and documentation of the management, and appoints the initial board and senior management of the spun-off (Gibson Dunn, 2018). Therefore, the parent’s board has an impact on the post-spinoff starting position of the spun-off, and their characteristics are likely to influence future spun-off performance. In this paper, I do not find a relationship between parent’s board gender diversity and spun-off performance. However, I find a significant positive link between parent’s board size and spun-off performance. With this positive and significant relation, I fill the gap in the literature by introducing a first determinant for spun-off performance. Finding determinants for spun-off performance is important since spin-offs become a popular way of downsizing a company (Choi, 2014). As a consequence, the literature on this topic will also experience growth.

The structure of the paper is as follows. In Section 2, I review the literature on board characteristics and spun-off performance and develop the hypotheses. Section 3 describes the methodology that is used for the research. I present the results in Section 4. Finally, I conclude and discuss the findings in Section 5.

2. Theory

The board of a company is mainly concerned with two functions, which are monitoring and advising the management (Raheja, 2005; Adams and Ferreira, 2009). The management of a company must be monitored to make sure that managers’ interests align with the interests of the shareholders (Guest, 2009). The advisory function of the board consists of providing expert advice to the CEO and access to critical information and resources (Fama and Jensen, 1983). Besides, the board of directors plays an essential role in the design and implementation of strategic goals and maintaining relationships with the external environment (Ruigrok et al., 2006).

Most papers investigating board characteristics’ influence on firm performance use agency theory and resource dependence theory to structure their argumentation. From an agency theory perspective, the board of directors’ primary function is monitoring the company’s senior management. Due to the separation of ownership and control within a firm, an agency problem originates through asymmetric information and incomplete contracts (Fama and Jensen, 1983). There is a principal-agent relationship between the managers and the shareholders of the parent. The parent’s board monitors the managers, who are the agents, to protect the interest of the shareholders, who are the principals (Eisenhardt, 1989). Hereby, they try to align the interest

of the managers and owners of the firm as well as possible. This is important because misalignment of the interests could lead to agency costs at the expense of the shareholders (Hillman and Dalziel, 2003). When agency costs are reduced, the interests are better aligned and, in this way, firm performance improves (Fama, 1980; Mizruchi, 1983; Zahra & Pearce, 1989).

According to resource dependence theory, the board of directors’ primary function is the ability to bring resources to a company (Hillman et al., 2000). The existing literature provides four ways in which a board member can provide resources. One could provide the company with advice, legitimacy, channels for communication, or support from stakeholders outside the organization (Hillman and Dalziel, 2003). Resources reduce uncertainty for a company (Pfeffer, 1972), lower transaction costs (Williamson, 1984), and diminish dependencies between the company and outside (Pfeffer & Salancik, 1978). Therefore, the provision of resources leads to improved firm performance (Hillman and Dalziel, 2003).

In case of a spin-off, the parent’s board is concerned with specific tasks. They have to approve the agreements and other legal documentation, approve pre-spinoff internal reorganization transactions, and appoint the initial board and senior management (Gibson Dunn, 2018). Besides, the parent’s board could advise the management. For instance, they could provide advice regarding the interpretation of spin-off related agreements. The fact that the board of the parent has to approve pre-spinoff decisions made by the senior managers and the fact that they can provide the management with resources shows that their monitoring and advisory roles apply to spin-offs as well. Therefore, agency theory and resource dependence theory are usable theories to develop my hypotheses.

2.1 Board gender diversity and performance

Due to the financial scandals and the financial crisis of 2008, many companies started to improve the effectiveness of their board of directors (Reguara-Alvarado et al., 2015). This led to a rise in different types of diversity within boardrooms (Hillman et al. 2002). For instance, by adding more female directors to a male-dominated board, the directors’ perspectives differ more (Farrell and Hersch, 2005). When a board has a broader scope, more issues relating to a spin-off are discussed. Therefore, board gender diversity enables better decision-making. According to the literature, board gender diversity can be defined as the proportion of men and women present on a board (Gordini and Rancati, 2017). Researchers noted the popularity among this topic and extensively investigated board gender diversity (Rosenzweig, 1998).

Academic literature describes many differences between men and women. Female directors are more educated and attend different schools than male directors (Singh et al., 2008). Different educational backgrounds induce their human capital endowments to develop in another manner than their male colleagues (Becker, 2009). Thereby, they bring diverse external expertise to the board of directors (Hillman et al., 2000, 2007). Huse and Solberg (2006) found that women are better prepared for meetings. When they attend meetings, they also have a more active participation and more questions than their male colleagues (Konrad et al., 2008). By being more active and better prepared for a meeting, the ability to foresee issues and develop ideas to improve the business increases.

Women also possess different inborn characteristics. For instance, they tend to be more sensitive to risk and are more likely to adopt long-term strategies than men (Byrnes et al., 1999; Eckel and Grossman, 2002, 2008). Besides, women are more risk-averse and propose less aggressive and more sustainable strategies than their male colleagues (Croson and Gneezy, 2009; Niederle and Vesterlund, 2007; Post and Byron, 2015; Apesteguia et al., 2012). This difference in preferred strategies is likely to influence the decision-making process of the board.

Boards appoint and monitor the management of a company and guide a firm’s strategy (Adams et al., 2010; Baglioni and Colombo, 2013). Therefore, board composition has a substantial impact on firm performance (Hermalin and Weisbach, 2003). According to Robinson and Dechant (1997) companies with a board of directors that consists of men and women, who bring different expertise, intelligence, and insights are more creative and innovative. Besides, their paper states that heterogeneous boards make decisions of higher quality than more homogeneous boards.

A growing number of investors make investment decisions based on information about board behavior, board structure, and board governance (Gillan and Starks, 2000). Board gender diversity plays an essential role in the board structure and board governance. Next to investors, companies are increasingly approaching board gender diversity as a value-driver in corporate governance as well (Marinova, Plantenga, and Remery, 2016). As a result of the growing attention for gender diversity among investors, an organization needs a higher board gender diversity than its competitors. When this is realized, the company will attain more positive attention compared to the competition. Post and Byron (2015) found that greater gender diversity on board positively influences investors’ evaluation of future earning potential of firms that have more female directors. This will lead to a higher demand of stocks and an increase in their price (Reguera-Alvarado et al., 2015).

However, boards do not always take advantage of being more diverse. Female directors tend to be younger and have less CEO experience than their male colleagues (Ahern and Dittmar, 2012). Moreover, women tend to be more employed as nonexecutive managers (Ahern and Dittmar, 2012). For these two reasons, male directors do not always take female’s opinions seriously. Therefore, female directors do not always feel treated as full members of a board, resulting in deteriorated communication and decision-making (Groysberg and Bell, 2013). This could lead to tensions within a board of directors.

There is a relatively large number of studies examining the relationship between board gender diversity and firm performance. Based on the above, board diversity could lead to improved or deteriorated decision-making, monitoring and advisory. Accordingly, the findings of these studies are mixed (Li and Chen, 2018). Some studies found a positive relationship (Arun et al., 2015; Campbell and Mínguez-Vera, 2008; Carter et al., 2003; Kim and Starks, 2016; Reguera-Alvarado et al., 2015; Sabatier, 2015). In contrast, some studies did not find a causal relationship (Carter et al., 2010; Wang and Clift, 2009) and studies that found a negative link (Adams and Ferreira, 2009; Ahern and Dittmar, 2012; Terjesen et al., 2016).

The mixed findings are also visible at the level of countries and even within countries. Carter et al. (2003) and Campbell and Mínguez-Vera (2008) found a positive relationship between board gender diversity and film value for companies in the United States. On the other hand, Adams and Ferreira (2009) found a negative relationship between board gender diversity and firm performance in the United States. Ahern and Dittmar (2012) found a negative relationship for Norwegian companies, after the implementation of a law that required public-limited firms to have at least 40% women on their boards by July 2005. However, Randøy et al. (2006) did not find a significant diversity effect of gender, age, and nationality on stock market performance or ROA for firms in Denmark, Norway, and Sweden.

Based on the above, I argue that the literature in the area of board gender diversity and firm performance is mixed. Nonetheless, according to Joecks et al. (2013), the papers that did not find a relationship (Haslam et al., 2010; Rose, 2007; Randøy et al., 2006) or found a negative relationship (Ahern and Dittmar, 2012; He and Huang, 2011; Bøhren and Strøm, 2010) between these variables may be affected by an overall low or high female representation which invalidates their results. If the relationship between board gender diversity and firm performance is shaped like a converted U, the studies affected by an overall high or low female representation would most likely find a negative relationship (Joecks et al., 2013). In addition, there is evidence that not only the presence of female directors, but also the percentage of women on the board significantly affects firm performance (Joecks et al., 2013).

Summarizing, there are multiple reasons why more gender-diverse boards enhance firm performance. First, women bring different expertise, intelligence, and insights that are more creative and innovative. Second, they have diverse educational backgrounds. Third, the inborn characteristics of women are different. These three points contribute to a broader view, which leads to better decision making and better performance. Finally, investors use information about board structure more often, in which gender diversity plays an important role.

2.2 Board size and performance

As mentioned earlier, the two main functions of the board are monitoring and providing advice. The number of directors on a board can be a determinative factor for the effective fulfillment of these functions (Kumar and Singh, 2013). From an agency perspective, a board of directors with a high number of directors retains an improved ability to monitor the management because more directors safeguard the interests of the shareholders (Arosa, 2013). Thus, the monitoring function should become more effective. Resource dependence theory argues that a higher number of directors features more available resources (Arosa, 2013). Thus, the more resources a board has, the better it should be able to fulfill its advisory function effectively. The effective fulfillment of these functions improves the quality of strategic decision-making, which ultimately leads to better firm performance (Arosa, 2013). The paper of Larmou and Vafeas (2010) confirms the argument that smaller firms can make a performance gain by adding one director to the board.

However, while adding a director can improve the ability to fulfill the monitoring and advisory tasks, there may be a point at which the benefits are outweighed through poor communication and decision-making (Cheng, 2008). Jensen (1993) found that when a board is larger, it becomes harder to arrange board meetings, reach consensus and make decisions. Besides, board cohesiveness decreases because the probability that a board member shares a common purpose is smaller (Lipton and Lorsch, 1992). Moreover, Singh and Davidson (2003) investigated the effectiveness of boards and concluded that larger boards are associated with less efficient use of their assets as measured by the asset-turnover ratio. Based on this paper, a larger board would lead to less effective functioning regarding the board’s advisory and monitoring roles.

The findings of academic literature regarding the relation between board size and firm performance are mixed. Guest (2009) found that board size has a negative relationship with profitability, Tobin’s Q, and share returns for Listed firms in the UK. Besides, they found that

this relationship becomes more negative when corporations become larger. Larger corporations appear to have more board members. Similarly, Bennedsen et al. (2008) found a negative relationship between board size and firm performance for their sample of family firms in Denmark. Besides, Nakano and Nguyen (2013) investigated the relationship between board size and market value for Japanese firms. They found a negative influence of larger boards on market value. Their analysis indicates that firms with larger boards are more likely to overinvest and are less likely to divest poorly performing assets. Finally, Mak and Kusnadi (2005) found a strong negative effect of board size on both firm value and firm operating performance for their sample of Singaporean and Malaysian firms.

In contrast, Larmou and Vafeas (2010) focus on smaller firms in their paper and found that board size is positively related to share price performance. Kiel and Nicholson (2003) and Pham et al. (2011) found a positive relationship between board size and Tobin’s Q. Parallel to this, Henry (2008) found the same relationship, but dependence this disappeared when he controlled for industry effects.

Summarizing, the literature in the area of board size and firm performance is mixed. The board’s size is a trade-off between benefits and drawbacks (García-Ramos and García-Olalla, 2011). This off is made by both SME’s and listed firms, but the outcomes of this trade-off is different because listed firms are bigger and probably need more directors to fulfill the monitoring role properly.

2.3 Hypotheses development

As mentioned earlier, most papers investigating board characteristics’ influence on firm performance use agency theory or resource theory to structure their argumentation. Following Pucheta-Martínez et al. (2018); Carter et al. (2010); Reguera-Alvarado et al. (2015); Arosa et al. (2013); and Guest (2009) I use both agency theory and resource dependence theory to develop the hypotheses regarding the relation between board characteristics and spun-off performance.

The agency view notes that a board performs an important monitoring role (Fama & Jensen, 1983; Jensen & Meckling, 1976). The board has to align the interests of the shareholders and owners of the firm. This is important because misalignment of the interests could lead to agency costs at the expense of the shareholders (Hillman and Dalziel, 2003). When agency costs are diminished, the interests are better aligned, and firm performance improves (Fama, 1980; Mizruchi, 1983; Zahra & Pearce, 1989). According to the resource dependence theory, the

primary function of the board of directors is the ability to bring resources to a company (Hillman et al., 2000). A board member can bring resources to a board in multiple ways, for instance, by providing advice, reduced uncertainty, lower transaction costs, and diminished dependencies between the firm and the outside. These resources lead to enhanced firm performance (Hillman and Dalziel, 2003).

The board of the parent company attains essential functions within the spin-off process. First, the board must approve all spin-off related agreements, pre-spin-off internal reorganization transactions and other legal documentation (Gibson Dunn, 2018). Without their approval, the spin-off cannot be completed. Therefore, they can guide the whole process in a way that is most beneficial for them. This gives the parent’s board a dominant position in the period before the spin-off transaction is completed. Second, the board appoints the initial board of directors and senior management of the spun-off entity (Gibson Dunn, 2018). This enables the parent’s board to choose directors and managers of the spun-off firm that operate according to their desires. The decisions that these directors and managers make will eventually impact the financial performance of the spun-off entity. Besides the fact that the parent’s board chooses directors and managers for the spun-off, they also advise them on spin-off related agreements and transactions. By executing these functions, they can influence the starting situation of the spun-off. Assets and resources will be split between the pre-spinoff parent and the spun-off. The amount of assets and resources that become available for the spun-off, will contribute to its performance. Therefore, the parent’s board indirectly affect future performance of the spun-off. Third, the parent’s board declares how the distribution of stock dividends to the shareholders of the parent will take place. Hereby, the parent company owners will become owners of the spun-off entity (Gibson Dunn, 2018). The distribution of stocks has consequences for the final ownership structure. A higher amount of stock means the total amount of equity that the spun-off possesses is higher too. This relatively lowers the leverage ratio of the off and enables them to sign larger debt contracts. As a consequence, the spun-off will be able to invest more, which eventually boosts performance of the spun-spun-off as well. Based on the above, one can state that the parent’s board influences the future performance of the spun-off entity. There might be certain board characteristics that play a significant role in this. The first characteristic I investigate is board gender diversity. The literature provides different arguments in favor of more gender-diverse boards. Women tend to bring different expertise, intelligence and insights (Dechant, 1997), higher qualifications (Singh et al., 2008) and have different inborn characteristics that lead to less aggressive and risky strategies

(Croson and Gneezy, 2009; Niederle and Vesterlund, 2007; Post and Byron, 2015; Apesteguia et al., 2012).

From an agency perspective, these increased personal differences among board members lead to a better ability to monitor the managers of the parent company (Kumar and Singh, 2013). When a board is more gender-diverse, more issues relating to a specific topic are discussed. As a consequence, the parent board should be able to fulfill its monitoring function more effectively within the spin-off process. When the parent’s board is more gender-diverse, it will monitor the parent’s managers more effectively during the spin-off process. The managers will be criticized more on issues related to the spin-off’s paperwork. Hence, a more gender-diverse board will approve better and more complete spin-off related agreements, pre-spin-off internal reorganization transactions and other legal documentation compared to a board without gender diversity. In this way, a more gender-diverse board leads to an improved starting position for the spun-off, making it more likely to reach enhanced future performance.

Resource dependence theorist would argue that, due to the increased personal differences between board members mentioned earlier, the parent’s board possess more resources (Arosa, 2013). With those resources, they can provide the parent’s managers with advice, legitimacy, channels for communication, or support from stakeholders outside the organization (Hillman and Dalziel, 2003). The managers of the parent use this information to generate agreements, transactions, and other documentation that will be more beneficial for the spun-off. Therefore, a more gender-diverse board can complete a spin-off in a way that will be more beneficial than a non-gender diverse board. This leads to enhanced future spun-off performance.

Based on this, I expect parent’s board gender diversity at the time of the spin-off announcement to have a positive influence on the spun-off’s future performance.

H1. Parent’s board gender diversity during the spin-off announcement has a significant positive effect on future firm performance of the spun-off entity.

The second characteristic I investigate is board size. Prior research argues that larger boards are better able to monitor and provide resources to managers (Kumar and Singh, 2013). These roles are also important during the spin-off process, where the parent’s board is concerned with the approval of agreements and the selection of managers and directors for the spun-off (Gibson Dunn, 2018).

From an agency view, it is the task of the parent’s board to monitor the managers of the parent. The interests of the parent’s managers should be aligned with the interests of the parent

company’s shareholders through monitoring (Jensen and Meckling, 1976). This also applies to spin-offs. The shareholders of the parent company will also become a shareholder of the spun-off entity. Therefore, the spun-spun-off will be able to fulfill its operations in the best possible way after the spin-off is completed in the shareholders’ interest. The parent’s board can guide the spun-off in that direction by the approval of all spin-off related agreements, transactions and other documentation, and appointment of the initial board of the spun-off (Gibson Dunn, 2018). According to Kumar and Singh (2013), larger boards have an improved ability to fulfill its monitoring role. Thus, they are capable of making decisions about the approval that is more favorable for the owners of the firm (Arosa, 2013). Hence, a larger board can fulfill its spin-off related tasks in a more beneficial way for the shareholders. When the parent’s board is larger, the spun-off will attain a better post-spinoff starting position compared to a board with fewer board members. In this way, a larger board size leads to enhanced future performance of the spun-off.

According to the resource dependence theory, the primary function of the board of directors is the ability to bring resources to a company (Hillman et al., 2000). The parent’s board also advises the parent’s management on spin-off related issues. The parent company managers have to prepare the spin-off related documentation and could obtain advice from the parent’s board. When the managers finished all the spin-off related documentation, the parent’s board approve the files and appoints managers and directors for the spun-off. According to Arosa (2013), a larger board leads to more available resources and a better ability to fulfill the advisory role. When parent’s board size is bigger, it has more available resources to advise the management of the parent. With this, the spin-off related documents that the parent’s board eventually approves are better compared to a board that consists of fewer directors. This gives spun-off entities with a larger parent board size a better starting position than a smaller parent board. Therefore, a larger board size leads to enhanced future performance of the spun-off. However, the literature states that there could be a point that the benefits of adding a director to the board will be outweighed by the downsides of poor communication and decision-making (Cheng, 2008). Besides, board cohesiveness decreases because the probability that a board member shares a common purpose is smaller (Lipton and Lorsch, 1992). Thus, the ability to fulfill the monitoring and advisory functions might decrease at a certain point. During the spin-off process, this could lead to worse spin-spin-off documentation compared to smaller parent’s boards. Eventually, this could lead to a worse starting position for the spun-off and decreased future spun-off performance.

Summarizing, literature states that it is easier for larger boards to fulfill its imposed tasks during the spin-off process, because larger boards are better able to perform their monitoring and advisory roles. A larger board’s monitoring ensures that the spin-off documentation only is approved when its content is in line with the interest of the shareholders compared to a smaller parent board. This leads to a better starting position and enhanced future performance for the spun-off. When a board is larger, it can better advise the parent’s managers during the spin-off process compared to a smaller parent board. Therefore, a larger board will have spin-off documentation that is more likely to favor the parent’s shareholders. This results in a better starting position and enhanced future performance for the spun-off. There are counter-arguments that board size could have a negative impact on decision-making and communication when boards become too large (Cheng, 2008). This might hold for everyday decision-making. However, decision-making in the area of spin-offs might be different from everyday decision-making. Spin-offs are corporate events that are rare. Directors do not have to deal with these cases daily. Therefore, the results for spin-offs might differ from regular decision-making.

In this sense, I expect the relationship between parents’ board size during the spin-off and future performance of the spun-off entity to be positive.

H2. Parent’s board size during the spin-off process and future performance of the spun-off entity will have a significant positive relationship.

3. Methodology

3.1 Sample

The initial sample for my empirical analysis consists of 496 completed spin-off transactions of firms in the United States, listed on the NYSE, Amex, or Nasdaq, that occurred between January 1999 and December 2014. Since I will analyze the performance of the spun-off five years after the spin-off transaction is completed, I do not include spin-offs that are completed after December 2014. Data regarding the spin-off transactions comes from SDC Platinum. Financial data is gathered from the Compustat North America database. I used BoardEx to collect gender and size-related board data. Any cases for which the financial or board data was not available are deleted. The final sample consists of 210 observations for 45 spin-off transactions.

3.2 Variables

An extensive amount of papers investigated the determinants of firm performance. Most of these papers use Tobin’s Q to measure firm performance (Adams and Ferreira, 2009; Campbell and Mínguez-Vera, 2010; Kumar and Singh, 2012; Pucheta-Martínez et al., 2018; Li and Chen, 2018). In this paper, I also use Tobin’s Q as a measure of spun-off performance, which I call

S_PERF. The Tobin’s Q of the spun-off entity is measured by the sum of the stock’s market

value and the book value of debt, divided by the book value of total assets (Gordini and Rancati, 2017). I will use the spun-off’s Tobin’s Q from the first five years after the spin-off is completed, since I want to investigate whether the independent variables influence the spun-off’s performance on the long-term. I selected this measure because it considers the shareholders’ expectations of future earnings and shows whether a firm has a competitive advantage relative to others and thus performs better (Montgomery and Wernerfelt, 1988). To measure board gender diversity, I use the Blau-index (P_BLWOM). This is computed as 1 − ∑𝑛_𝑖=1𝑃_𝑖2 where 𝑃_𝑖 is the percentage of board members in each category, and n is the total number of board members. Values of the Blau-index for gender diversity range from 0 to a maximum of 0.5, which occurs when the board comprises an equal number of men and women. I use the number of total board members of the parent (P_BSIZE) to measure board size. There might be other factors that influence spun-off performance, as well. Therefore, I control for other potentially influencing factors. First, I control for firm size of the spun-off since Mak and Kusnadi (2005), Rashid et al. (2010), and De Villiers et al. (2011) report a positive relation between firm size and firm performance. S_FSIZE is calculated by the natural logarithm of the book value of year-end total assets. Second, Ibrahim and Samad (2014) found that high financial leverage was positively associated with firm performance. Therefore, I control for leverage level, S_LEV, of the spun-offs. This is calculated as the ratio of total debt over total equity. Third, I control whether a spin-off is focusing or not. S_FOCUS will be 1 when the parent and the spun-off entity have another 2-digit SIC industry. Non-focusing spin-offs might lead to lower spun-off performance, because the parent could allocate fewer performing assets and more debt to the spun-off entity. Fourth, I control for S_YASPIN, the number of years after the spin-off is completed, and spun-off performance is measured. Since I look at the first five years after a spin-off is completed, the value of this measure can vary between 1 and 5. The performance of the company should improve over time. The spun-off becomes a stand-alone firm as a consequence of the spin-off. This means that required investments can be made without an internal fight with other business units, as would have been the case if the spin-off

had not have happened. Therefore, spun-off performance should increase over time. Finally, I control for industry-fixed and year-fixed effects to control for year- and industry-specific effects on spun-off performance. Table 1 provides an overview of all the variables of my regression analysis.

Table 1

Variable definitions Spun-off performance

S_PERF (Tobin’s Q) Tobin´s q of the spun-off entity for the first five years after the spin-off is completed, computed as (market value of stock + book value of debt) / book value of assets

Gender diversity

P_BLWOM Parent board gender diversity, measured as 1 − ∑𝑛_𝑖=1𝑃_𝑖2 where 𝑃_𝑖 is the percentage of board members in each category and n is the total number of board members of the parent (Blau-Index)

Board size

P_BSIZE The total number of total board members of the parent company

Control variables

S_FSIZE Natural logarithm of the book value of year-end total assets of the spun-off

S_LEV The spun-off’s total debt over total equity ratio

S_FOCUS 0 in case the parent and the spun-off have the same 2-digit SIC industry and 1 in case the parent and the spun-off have another 2-digit SIC industry

S_YASPUN The number of years after the spin-off is completed

3.3 Empirical model

I estimate a statistical version of this model by using an ordinary least squares (OLS) regression equation with industry and year-fixed effects. Based on my hypotheses, I expect a positive sign for the independent variables.

S_PERF_𝑖,𝑡 = β0+ 𝛽1𝑃_𝐵𝐿𝑊𝑂𝑀𝑖,𝑡+ 𝛽2𝑃_𝐵𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝛽3𝑆_𝐹𝑆𝐼𝑍𝐸𝑖,𝑡+ 𝛽4𝑆_𝐿𝐸𝑉𝑖,𝑡

+ 𝛽5𝑆_𝐹𝑂𝐶𝑈𝑆𝑖,𝑡+ 𝛽6𝑆_𝑌𝐴𝑆𝑃𝐼𝑁𝑖,𝑡+ 𝜇𝑖,𝑡+ ε𝑖,𝑡

4. Results

4.1 Descriptive statistics and correlations

The descriptive statistics of my final sample are shown in Table 2. The mean of Tobin’s q in my sample is 1.82. This means the market value of stock and book value of debt together are, on average 1.82 times bigger than the company’s book value of assets. The parent’s board in my sample consists, on average, about ten members. 1 out of 10 directors in my sample is woman, resulting in an average Blau-Index of 0.16. This indicates that the boards in my sample are predominantly not diverse. The natural logarithm of firm size is, on average, 3.08 for my sample. Leverage has a mean of 1.80 for my sample, indicating that companies, on average, have 1.80 times more debt than equity. 4 out of 10 spin-offs are focusing, since 43% of the cases the spun-off is operating in another industry than its parent. The average years after spin-off is 3, since I have a balanced sample with the same number of cases each year.

Table 2

Descriptive statistics

Variable N Mean Std. Dev. Min Max

S_PERF 210 1.82 1.21 0.44 10.01 P_BLWOM 210 0.16 0.14 0.00 0.49 P_BSIZE 210 10.19 2.82 5.00 18.00 S_FSIZE 210 3.08 0.84 1.27 4.98 S_LEV 210 1.80 2.94 0.09 37.79 S_FOCUS 210 0.43 0.50 0.00 1.00 S_YASPIN 210 3 1.42 1 5

Notes: This table shows the descriptive statistics for my sample. The definitions of the

variables are presented in Table 1.

The correlation matrix is shown in Table 3. The correlation between the performance of spun-off firms and board gender diversity of their former parent is not statistically significant at the conventional levels. This suggests that there is no relationship between gender diversity at the parent’s board and the Tobin´s Q of spun-off firms. The correlation between spun-off performance and parent’s board size is significant positive at the conventional level. This indicates a significant positive relationship between parent’s board size and the Tobin’s Q of spun-off firms.

In line with Sabatier (2015) and Li and Chen (2018), Tobin’s Q is negatively and significantly correlated to firm size. This suggests that spun-off firms with higher total assets perform significantly worse than spun-off firms with fewer assets.

In line with prior research, the board gender diversity and board size of the former parent are positively and significantly correlated, indicating that larger boards are more gender diverse (Carter et al., 2003; Li and Chen, 2018).

Finally, the coefficients of the correlations between the dependent variable and the other controls are not significant, which suggests that the performance of the spun-off firm is not related to its leverage, the type of off transaction, nor to the number of years after a spin-off is completed.

The Pearson correlations between the explanatory variables in my model are predominantly small. Therefore, it is unlikely I will face multicollinearity issues concerning the regression analysis. Table 3 Correlation matrix 1 2 3 4 5 6 7 1 S_PERF 1 2 P_BLWOM 0.03 1 3 P_BSIZE 0.14 0.48 1 4 S_FSIZE -0.35 0.49 0.28 1 5 S_LEV -0.08 0.18 -0.04 0.22 1 6 S_FOCUS -0.06 -0.17 0.13 -0.20 -0.06 1 7 S_YASPIN -0.09 0.00 0.00 0.05 -0.02 0.00 1

Notes: This table shows the matrix of Pearson correlation coefficients for the (in)dependent

and control variables used in this paper. The correlation coefficients which are significant at least at the 5% level are shown in bold.

4.2 Regression analysis

In Table 4, the results of the ordinary least squares (OLS) regression analysis with industry and year-fixed effects analysis are presented. Industry fixed effects and year fixed are not shown in the table. The results show that P_BLWOM has a positive but insignificant coefficient, suggesting that parent’s board gender diversity does not influence the performance of the spun-off firm. This is not in line with H1, which predicted that there would be a significant positive relationship between spun-off performance and board gender diversity of the former parent. Therefore, H1 is not supported.

However, the regression analysis results show a positive and significant relationship between spun-off performance and parent’s board size. For my sample, P_BSIZE has a coefficient of 0.10, indicating that adding one extra member to the parent’s board leads to an increase of Tobin’s Q of 0.10. The findings regarding this relationship are in line with H2. Consequently, my second hypothesis is supported.

With regard to the control variables, spun-off performance is negatively and significantly associated with S_FSIZE, which has a coefficient of -0.72. This relationship is not in line with my expectations for this variable. Besides, the dependent variable also has a significant relationship with spin-offs that are focusing. The coefficient of S_FOCUS is -0.46, indicating that focusing spin-offs are negatively and significantly associated with spun-off performance. This finding is not in line with my expectations.

The R-squared, with a value of 0.25, shows that all the included variables together contribute to an explanatory variance of 25 percent. This is similar to the R-squared of related studies (Adams and Ferreira, 2009; Carter et al., 2003; Gordini and Rancati, 2017; Guest, 2009).

Table 4

Regression analysis b (SE) p-value

P_BLWOM 1.13 (0.72) 0.117 P_BSIZE 0.10 (0.03) 0.001* S_FSIZE -0.72 (0.11) 0.000* S_LEV 0.00 (0.03) 0.972 S_FOCUS -0.46 (0.16) 0.005* S_YASPIN -0.05 (0.05) 0.329 Constant 28.33 (37.83) 0.455 R2 0.25

Notes: In this table, the industry and year fixed effects are not shown. However, they are

included in the model. The total number of observations (N) for the regression is 210. The variables that are significant at the 5% level are represented by an asterisk*.

5 Discussion and conclusion

5.1 Findings

A growing number of companies started to downsize by spinning off a business unit (Choi, 2014). Literature provides evidence that spin-offs increase performance for the pre-spinoff parent, because a reduction in information asymmetry and a decrease in diversification occurs (Krishnaswami and Subramaniam, 1999; Aggarwal and Samwick, 2003). However, there is no literature investigating the financial performance of the spun-off. As mentioned earlier, the parent’s board plays an important in the spin-off process (Gibson Dunn, 2018). They have a significant impact on the design of the completed spin-off transaction, which might influence the future performance of the spun-off (Gibson Dunn, 2018). Therefore, there could be characteristics of the parent’s board that influence spun-off performance.

My paper investigates whether parents’ board gender diversity and board size impact the future performance of a spun-off entity. For this research, I use spin-off data of listed firms in the United States between January 1999 and December 2014. Drawing on agency theory and resource dependence theory, I propose that both parent’s board gender diversity and board size have a positive effect on the future performance of the spun-off.

The first hypothesis concerns the relation between spun-off performance and board gender diversity. I expect a positive and significant relationship between these variables. Women tend to bring different expertise, intelligence and insights (Dechant, 1997), higher qualifications (Singh et al., 2008) and have different inborn characteristics that lead to less aggressive and risky strategies (Croson and Gneezy, 2009; Niederle and Vesterlund, 2007; Post and Byron, 2015; Apesteguia et al., 2012). Hence, the parent’s board will be able to make decisions from a broader perspective than a board that is only represented by male directors. Due to this broader perspective, the parent’s board can make decisions that are fairer to both spun-off and the former parent. With regard to spin-offs, the parent’s board approves different agreements, documentation, transactions related to the spin-off, distributes assets and liabilities, and appoints directors and managers of the spun-off entity (Gibson Dunn, 2018). When the parent’s board can base its approval of spin-off related agreements, distribution of assets and liabilities, and appointment of directors and managers on a broader perspective, the decisions will be better and more beneficial for the spun-off. When the quality of the decisions is higher, the spun-off will have a better starting position. This leads to enhanced future spun-off performance.

Regarding the relationship between the parent company’s board size and performance of the spun-off, I also expect to find a positive relationship. A larger board has an improved ability to fulfill its monitoring role (Kumar and Singh, 2013). This improved ability to monitor is also beneficial during the spin-off process with regard to the agreements, transactions, and other documentation. If a board is larger, the board can make better substantiated approvals that are more favorable for the owners of the firm (Arosa, 2013). Namely, the goal of the monitoring role is to align the interests of the managers and the shareholders of the parent. By approving the agreements, transactions, and other documentation that are favorable for the shareholders, the starting position of the spun-off will be better, and future performance will be enhanced. Besides, a higher number of directors leads to more available resources and a better ability to fulfill the advisory role within the spin-off process (Arosa, 2013). The parent’s board could advise the managers of the parent on the agreements, transactions, and other documentation. As a result of this, the spun-off would start with more favorable agreements and contracts, which allows them to have a better starting situation after the spin-off is completed. Thus, a larger board will lead to more enhanced performance compared to a smaller parent’s board. I used an ordinary least squares (OLS) regression model with industry and year-fixed effects to test my two hypotheses. The first hypothesis, where I expected a positive and significant relationship between spun-off performance and parent’s board gender diversity, is not supported. There is a positive coefficient. However, the relation is not significant. Thus, there is no link between these my dependent variable and parent’s board gender diversity.

An alternative explanation for this result is that female directors tend to be in less powerful positions compared to their male colleagues (Dalton et al., 2006; Peterson and Philpot, 2007; Zelechowski and Bilimoria, 2004). If women are present on a board of directors but do not serve as chair of a committee, their influence might be limited. This results in women sending a weaker signal to the rest of the board (Miller and del Carmen Triana, 2009). Their influence on performance could be reduced by sending this weaker signal.

Another possible explanation for missing support for this finding is that the number of women in my sample is relatively small. With an average representation of 10 percent, women were highly underrepresented in the board of directors in my sample. Joecks et al. (2013), found that women on a board negatively impacted financial firm performance. However, they state that the relationship becomes positive and significant when a ‘critical mass’ of 30 percent of women is present on a board of directors. When the ‘critical mass’ is reached, there are enough women on the board to make a real impact on decision-making (Erkut et al., 2008). This impact will also be made during the spin-off process and will contribute to an enhanced starting position

for the spun-off. Eventually, this will lead to better spun-off performance. Thus, to find a positive and significant relationship between parent’s board gender diversity and spun-off performance, the percentage of women in the sample should be higher.

Nevertheless, I found a significant relation for my second hypothesis. I expected a positive and significant relationship between spun-off performance and parent’s board size. This relationship is confirmed by the regression analysis, where I found a positive and significant coefficient. Therefore, H2 is supported. This result is consistent with Larmou and Vafeas (2010), Kiel and Nicholson (2003), Pham et al. (2011), and Henry (2008).

5.2 Theoretical and practical implications

The findings of this paper have a theoretical implication for the literature on board characteristics. There is an extensive amount of articles investigating the relationship between board characteristics and firm performance in stand-alone firms (Haslam et al., 2010; Rose, 2007; Randøy et al., 2006; Ahern and Dittmar, 2012; He and Huang, 2011; Bøhren and Strøm, 2010; Arun et al., 2015; Campbell and Mínguez-Vera, 2008; Carter et al., 2003; Kim and Starks, 2016; Reguera-Alvarado et al., 2015; Sabatier, 2015; Carter et al., 2010; Wang and Clift, 2009; Adams and Ferreira, 2009; Terjesen et al., 2016; Guest, 2009; Bennedsen et al., 2008; Nakano and Nguyen, 2013; Larmou and Vafeas, 2010; Kiel and Nicholson, 2003; Pham et al., 2011; Henry, 2008). But there are no papers linking parent’s board characteristics to future performance of their spun-off entities. This is surprising considering the crucial role of the parent’s board in the divesture decision.

The findings of my paper imply that parent’s board gender diversity does not impact spun-off entities’ performance. This is consistent with studies like Mehrota et al. (2003) and D’Mello et al. (2008). They find that governance characteristics do not shape the allocations of assets and liabilities between parents and spun-off firms. Besides, Carter et al. (2010) do not find significant results between board gender diversity and firm performance for stand-alone firms in the United States. My paper implies that their findings also hold when parent’s board gender diversity is related to the performance of spun-off entities.

With regard to parent’s board size, my paper suggests that it has a significant positive effect on performance of the spun-off. This is in line with the papers of Hidayat and Utama (2016) and Larmou and Vafeas (2010). They find a significant positive relationship between board size and Tobin’s Q in stand-alone firms. My paper implies that the results of their papers also hold when parent’s board size is related to spun-off performance, instead of stand-alone firms.

Besides, the findings have another theoretical implication for the spin-off literature. There are no papers that investigate determining factors for spun-off’s future performance. My results show that board gender diversity at the former parent is not a determinant of the future performance of spun-off firms. It disqualifies parent’s board gender diversity as a possible determinant for spun-off performance. On the other hand, my results show a significant positive relationship between parents’ board size and spun-off performance. Therefore, they introduce board size as a determinant for spun-off performance. Since spin-offs are becoming a more popular topic around practitioners (Choi, 2014), the available amount of literature should also increase. Hereby, the understanding of these corporate events will be broadened. With this paper I take a step in that direction.

My paper also has a practical implication. For investors, spin-offs are important corporate events and findings on how certain board characteristics of the former parent influence future spun-off performance is relevant for their investment decisions. Based on my findings, investors might include the former parent’s board size as relevant factors for their investment decisions. Besides, it could have practical implications for policymakers. At the moment, gender diversity at corporate companies is an important issue, since there is a growing number of nations where a certain percentage of female directors on a board is enforced by law. As a result of this paper, one could argue that these laws do not have the expected positive effect, and suggests that imposing gender quotas might not bring financial benefits for stand-alone firms.

5.3 Limitations

The limitation of this study are as follows. First, I only included spin-offs of listed firms from the United States in my sample. The results of the study might be different when spin-offs of non-listed firms or spin-offs of firms in other countries were included. For instance, most countries in Europe have another governance structure than the United States. A two-tier board is most common in Europe, while the United States uses the one-tier board structure. The main difference is that a two-tier board is segregated in a management board and a supervisory board, while these two are combined in the one-tier board structure (Block and Gerstner, 2016). The difference in board structure might lead to a different dynamic within the board. Eventually, this could lead to different outcomes.

Second, I determined the spun-off’s performance by looking at the Tobin’s Q from the first five years after the spin-off was completed. In this period some spun-offs were acquired by