1
Corporate spin-offs and long-term shareholder value: The effect
of investor protection and shareholdings of major shareholder.
Roelof Planting (S2882515)
MSc A&C Controlling and MSc International Financial Management Supervisor: dr. Vlad-Andrei Porumb / Co-assessor: dr. Halit Gonenc (IFM)
Date: 08-01-2021 / Words: 11,304
Abstract
Corporate spin-offs represent major divestitures, which are intended to create shareholder value. In this study, I empirically examine the effects of corporate spin-offs on long-term shareholder value creation. Using yearly and monthly data of 355 spin-offs from 19 countries in the 2000 to 2016 period, I find that corporate spin-offs negatively affect long-term shareholder value creation (proxied by stock returns, Tobin’s Q, and ROA). Further, I investigate if - in line with indications in prior literature - international cross-country corporate governance variation has an impact on this relation. I, therefore, investigate the moderating role of (1.) investor protection and of (2.) the shareholdings of major shareholders. While I do not find a systematically significant moderating effect of investor protection, I document that in common law countries the relationship between corporate spin-offs and long-term shareholder value creation is incrementally negative, in the 6 and 24 months post-spin-off period. Regarding the effect of the shareholdings of major shareholder, I find that a significant negative moderating effect in the 12 months post-spin-off period for majority shareholders holding more than 50 percent of shares. To the best of my knowledge, this is the first study that (1.) focuses on the long-term shareholder value and (2.) incorporates an international sample, to (3.) assess the moderating impact of corporate governance mechanisms.
Keywords: Corporate spin-offs; Long-term shareholder value; Corporate governance; Investor protection; Shareholdings of major shareholder.
2 1. Introduction
“Just as divorces can cost more than getting married, spin-offs tend to be more complicated affairs than mergers” – Marco Sguazzin, Partner at Deloitte Consulting
A corporate spin-off represents a way to improve corporate focus by divesting a part of the company. It presumes the division of one firm into two standalone entities, whereby the shares of the spun-off firm are pro-rata distributed to the shareholders of the former parent firm (Schipper & Smith, 1983). The uniqueness of a corporate spin-off transaction is that the corporate assets are divested without a cash transaction. In the post-spin-off period, the management and operations of the spun-off entity are decoupled from the former parent company(Krishnaswami & Subramaniam, 1999).
The academic literature suggests that the corporate spin-offs are intended to create shareholder value. Since the 1980s, academics have assessed the impact of corporate spin-off transactions on shareholder value creation. While the impact of corporate spin-offs on short-term shareholder value creation has been extensively researched, the impact of corporate spin-offs on long-term shareholder value creation has been largely neglected (Veld & Veld-Merkoulova, 2009). Generically, long-term effects are more interesting for academics relative to short-term effects (Fama, 1998), because the stock market consistently overreacts to new information and therefore stock price has transient swings (Conrad & Kaul, 1993). In the context of corporate divestitures, a study in The Economist (2019) compared the share price of six firms that announced a spin-off with the broader market (S&P500 and MSCI Europe) and concluded that in four of the six cases the broader market outperformed the spin-off engaging firms over the long-term. Therefore, I formulate my first research question (RQ): What is the effect of corporate spin-offs on long-term shareholder value creation?
The current studies regarding corporate spin-offs and long-term shareholder value creation document contrasting findings. Veld and Veld-Merkoulova (2004) and Zakaria and
3 Arnold (2016) found no significant relationship between corporate spin-offs and abnormal returns in respectively European countries and Malaysia. However, Cusatis et al. (1993) and Chai et al. (2018) found that corporate spin-offs in respectively the U.S. and Australia generated significant positive abnormal returns over a longer period, which indicated that corporate spin-offs in these countries positively impact long-term shareholder value creation. Overall, prior findings imply that there is a significant international variation concerning the impact of corporate spin-offs on long-term shareholder value. Surprisingly, prior research focused on specific country settings (Veld & Veld-Merkoulova, 2009) and did not assess the potential moderating effects of country-level characteristics (e.g. culture, legal system, and corporate governance). I expand prior literature by considering an international sample, since cross-country differentiation is important for long-term shareholder value creation in the context of corporate spinoffs.
The sample for my empirical study consists of 355 corporate spin-offs from 19 countries, in the 2000-2016 period. I find that corporate spin-offs are negatively associated with the yearly stock returns for periods of the first 3 and 5 years after the corporate spin-off. Currently, the monthly stock returns are negatively associated with corporate spin-offs for the first 24 and 36 months post-spin-off period. Additional analyses with yearly Tobin’s Q, monthly Tobin’s Q, and change in monthly Tobin’s Q show a significant negative effect of corporate spin-offs on long-term shareholder value. Results with yearly and monthly ROA as a measure of long-term shareholder value creation are negative, but lack significance. Overall, these results indicate that corporate spin-offs are negatively associated with long-term shareholder value at the parent firm level, in the post-spin-off period.
Further, I use the salience of my international sample, to see if the results in my first research question vary depending on country characteristics. Veld and Veld-Merkoulova (2004) and Boreiko and Murgia (2016) argue that cross-country differences related to corporate
4 governance could explain differences in the long-term shareholder value creation of corporate spin-offs.1 Corporate governance is documented to vary significantly among countries (Chizema & Shinozawa, 2011), which is a crucial matter for corporate spin-offs. This is because the managerial decision to execute a corporate spin-off is associated with an agency problem due to information asymmetries regarding the spin-off transaction between the company’s executives and the company’s shareholders (Bergh et al., 2008).
The managerial discretion associated to a corporate spin-off decision could be motivated by either (1.) strategic or (2.) opportunistic motives (Markides & Berg, 1992). If a corporate spin-off is motivated by strategic arguments, then a corporate spin-off should create shareholder value (Markides & Berg, 1992). Literature assumes that shareholders’ objective is generally to maximize the shareholder value (Thomsen & Pedersen, 2000). However, the firm’s executives may choose divestitures for their self-interest (e.g. reducing employment risk) at the costs of their shareholders (Brahmana et al., 2020). Information asymmetries about the divestiture decision can create conditions where executives could potentially manipulate earnings and costs, making investors vulnerable to adverse selection (e.g. hidden information) and/or moral hazard problems (e.g. hidden actions) (Bergh et al., 2008).2
The adverse managerial behaviour in divestiture decisions could be reduced by several corporate governance mechanisms. First, investor protection is defined as the legal framework, which protects shareholders and creditors against adverse managerial behaviour (Veld & Veld-Merkoulova, 2004). La Porta et al. (2002) mention that the level of investor protection indicates cross-country differences in corporate governance practices. Second, the agency theory suggests that better monitoring by shareholders should reduce adverse managerial behaviour (Jensen & Meckling, 1976). Kweh et al. (2020) defined shareholdings of the major shareholder
1 Corporate governance is defined as mechanisms by which a company’s stakeholders exercise control over the company’s
executives so that their interests are better protected. The primary reason for firms to implement corporate governance mechanisms is the separation between ownership (shareholders) and control (executives), which generally leads to agency problems due to a conflict of interests (John & Senbet, 1998).
5 as the percentage of shares owned by the largest shareholder. The corporate governance literature argues that major shareholders with larger shareholdings have stronger incentives to monitor and have more power executives which increases executives’ tendency to maximize shareholder value (Thomsen & Pedersen, 2000). Therefore, in countries with higher investor protection and firms with larger shareholdings of the major shareholder the probability of opportunistic managerial behaviour related to the corporate spin-off is reduced.
On the other hand, stock-listed firms already have a high degree of transparency and many monitoring systems in place. Stock exchanges and regulators impose a high level of disclosure (Leuz & Wysocki, 2016), scrutiny (Kolev et al., 2008), and auditing (Kleinman et al., 2014). In the case of corporate spin-offs, stock exchanges often expect additional disclosure about the separated entities to enable the capital market to evaluate the corporate spin-off (Habib et al., 1997). These arguments might declare why there are no cross-country differences related to the long-term value creation of corporate spin-offs.
The extent to which I am likely to find that cross-country differences impact the relationship between corporate spin-offs and long-term shareholder value creation remains an empirical question that this paper aims to address. Aside from the cross-country differences, Veld and Veld-Merkoulova (2004) and Boreiko and Murgia (2016) suggested additional research towards the impact of corporate governance mechanisms among countries on the relationship between corporate spin-offs and shareholder value. Therefore, this paper answers this call for research by the following RQ: How do investor protection (country-level) and shareholdings of major shareholder (firm-level) affect the relationship between corporate spin-offs and long-term shareholder value creation?
To answer the part of the RQ concerning investor protection, I base my tests on 257 corporate spin-offs from 15 countries, in the 2006-2016 period.Results indicate that investor protection does not significantly affect the relationship between corporate spin-offs and
6 monthly stock returns. Although there is no systematically significant moderating effect of investor protection on the relationship between corporate spin-offs and long-term shareholder value creation, I document a significant negative effect of common law countries3 on this
relationship. In the 1 to 6 months and 1 to 24 months post-spin-off period, common law countries are associated with a negative moderating effect on the relationship between corporate spin-offs and long-term shareholder value creation.
To address the part of the RQ concerning the shareholdings of the major shareholder, I rely on 176 corporate spin-offs from 13 countries, in the 2006-2016 period. I find that shareholdings of the major shareholder do not significantly affect the relationship between corporate spin-offs and monthly stock returns. Additional tests with the variable blockholder4
support this finding. However, if the variable shareholdings of the major shareholder is replaced by majority shareholder5, I detect a significant negative effect of the majority shareholder on the relation between corporate spin-offs and long-term shareholder value creation on the first 12 months post-spin-off period.
This paper makes several contributions to the corporate spin-off literature. First, the study contributes by considering the long-term shareholder value effects of corporate spin-offs at the level of the parent. This paper differentiates itself from prior literature due to its (1.) international setting and (2.) focus on the long-term effects of corporate spin-offs on shareholder value. I hypothesized that corporate spin-offs affect shareholder value in the long-term. This hypothesis is supported because my empirical findings indicate that corporate spin-offs have a significant negative effect on long-term shareholder value at the parent firm level for the 3 and 5 years post-spin-off period. The 24 and 36 months post-spin-off periods indicate likewise that corporate spin-offs negatively affect long-term shareholder value. This finding
3 Common law countries are generally characterized by higher degrees of investor protection (McLean et al, 2012). 4Bergh (1995) defined blockholders as large firm-owners that hold blocks of at least 5% of a company’s shares.
5 Holderness and Sheehan (1988) defined a majority shareholder as a firm-owner that owns more than 50% of a company’s
7 has strategic implications for the firm, because managers and investors know that corporate spin-offs are likely to negatively affect the long-term shareholder value at the parent firm.
Furthermore, this paper contributes to the corporate governance literature. This paper incorporates corporate governance practices as moderating variables on the relationship between corporate spin-offs and long-term shareholder value. Corporate governance practices vary among countries and are, therefore, a cross-country differential that could explain the long-term success of corporate divestitures. Further, my empirical findings indicate that investor protection and shareholdings of a major shareholder have both an insignificant effect on the relationship between corporate spin-offs and long-term shareholder value. This finding suggests that the country of incorporation, in terms of investor protection, does not affect the relationship between corporate spin-offs and long-term shareholder value. Although investor protection has an insignificant effect, common law countries do have a significant negative effect on the relationship between corporate spin-offs and long-term shareholder value creation in the 6 and 24 months post-spin-off period. Further, a major shareholder with larger shareholdings does not affect the impact of corporate spin-offs on long-term shareholder value. However, majority shareholders have a significant negative effect on the relation between corporate spin-offs and long-term shareholder value creation in the 12 months post-spin-off period. These findings imply that shareholders and/or managers should not expect more beneficial long-term shareholder value effects after the corporate spin-off at the parent firm in higher investor protection countries or firms with a major shareholder with larger shareholdings.
The rest of this paper is structured as follows. The literature review and hypothesis development are discussed in respectively Section 2 and Section 3. The data and methodology are described in Section 4. The empirical results are included in Section 5. Finally, the conclusions and discussion are respectively included in Section 6 and Section 7.
8 2. Literature review
2.1. Corporate spin-offs and long-term shareholder value
The general assumption in the corporate spin-off literature is that corporate spin-offs should have a positive effect on the long-term shareholder value. This assumption is based on the focus-increasing hypothesis, managerial incentive hypothesis, information asymmetry hypothesis, and the corporate control hypothesis (Boreiko & Murgia, 2016). These hypotheses will be discussed in the following paragraphs.
2.1.1. Focus-increasing hypothesis
Following the focus-increasing hypothesis will the firm performance be improved, when the executives focus on the core business of their firm (Daley et al, 1997). Firms are, generally, able to increase their industrial or geographical focus by selling unrelated divisions to other third parties or by spinning off an unrelated division to their shareholders (Desai & Jain, 1999). A corporate spin-off implicates some organizational changes, which may induce superior performance in both entities in the post-off period (Cusatis et al., 1993). A corporate spin-off enables each business division to develop its own strategic and operational plans without using other business division’s resources (Wachtell et al, 2016). Following this reasoning, a corporate spin-off could eliminate cross-subsidizing between unrelated divisions within a firm (Berger & Ofek, 1995). Cross-subsidizing enables underperforming operational divisions to temporarily financially rely on well-performing divisions (Desai & Jain, 1999). Elimination of cross-subsidizing caused by a corporate spin-off will reduce the agency costs due to less information asymmetry and hence enhances the long-term shareholder value (Berger & Ofek, 1995).
9 2.1.2. Managerial incentive hypothesis
Diversified firms experience challenges in aligning divisional performance and managerial compensation plans, which ultimately leads to managerial compensation plans based on overall organizational performance (Feldman, 2016). The managerial incentive hypothesis suggests new managerial compensation plans could be implemented in both entities after the completion of the corporate spin-off transaction (Boreiko & Murgia, 2016). Feldman (2016) argues that well-alignment managerial compensation plans enhance managerial motivation to take shareholder’s value-maximizing actions. According to Wachtell et al. (2016), the increased corporate focus caused by the corporate spin-off will impact the effectiveness of these new managerial incentive plans because the objectives of executives will be better aligned with their operational business. Boreiko and Murgia (2016) argue that these newly implemented managerial incentive plans in both entities should lead to improved operational efficiency, improved managerial monitoring, and reduced agency costs between executives and shareholders.
2.1.3. Information asymmetry hypothesis
Diversified firms face a higher degree of information asymmetry between the firms’ executives and the external capital markets, which negatively impacts the firm value (Krishnaswami & Subramaniam, 1999). Normally, the capital market receives operational and financial performance information regarding the past three or six months of the complete firm. These financial press releases, generally, consist of firm-wide performance information. The lack of division-specific performance information in these financial press releases increases the difficulty of the external capital market to determine each division’s performance and value. A spin-off announcement is followed by a disclosure of performance information of both entities (i.e. the former parent and the spun-off entity) separately, which enables the capital market to
10 revalue the division’s performance (Habib et al., 1997). This theory suggests a value increment right after the spin-off announcement.
However, every stock-listed company is obliged to provide periodical (e.g. quarterly) information to the capital market. In the case of a corporate spin-off, the former parent entity and the spun-off entity should inform the capital market about their own performance. The additional and profound information provision of both entities reduces the information asymmetry consequently. The consequent reduction of the information asymmetry between managers and investors due to the periodical financial press releases of both entities will reduce the firm’s financing costs in the long-run (Krishnaswami & Subramaniam, 1999).
2.1.4. Corporate control hypothesis
The corporate control hypothesis argues that a corporate spin-off might create shareholder value by facilitating the transfer of assets of either the former-parent or the spun-off entity to users, who can create more value with these assets (Cusatis et al., 1993). Chemmanur and Yan (2004) describe the corporate control hypothesis as the increased firm exposure to the possibility of a merger or takeover by engaging in a corporate spin-off. Spinning-off an entity makes a targeted entity easier to be acquired (Chai et al., 2018). Furthermore, Cusatis et al. (1993) describe that a corporate spin-off splits one company into separate businesses, which allows acquiring firms to create more value in one entity by avoiding the expenses of acquiring the whole, pre-spin-off firm. Prior researches find that a large portion of the abnormal returns of corporate spin-offs could be determined by merger and acquisition transactions, targeting the former parent and/or the spun-off entity (Cusatis et al, 1993; McConnell et al; 2001).
11 2.2. Corporate governance and agency problems
Corporate governance is generically defined as mechanisms by which a company’s stakeholders exercise control over the company’s executives so that their interests are better protected (John & Senbet, 1998). The primary reason for corporate governance mechanisms is the separation of ownership (shareholders) and control (executives) (John & Senbet, 1998). The corporate finance literature acknowledges that corporate governance mechanisms could impact the firm value positively, because corporate governance mechanisms can reduce the agency problem between corporate executives and shareholders (Pham et al., 2011). The agency problem implies that the agents (e.g. executives) do not always behave in the best interest of the principals (e.g. shareholders) in an agency relationship (Jensen & Meckling, 1976). Agency problems could generally be reduced by the improved alignment between the interests of the shareholders and executives and reduced information asymmetry. La Porta et al. (2002) argue that investor protection could improve interest alignment, while Thomsen and Pedersen (2000) argue that large shareholders (i.e. larger shareholdings of the major shareholder) could reduce information asymmetry. Therefore, these two variables will be discussed below.
2.2.1. Investor protection
Differences om corporate governance practices among countries are often indicated by investor protection (La Porta et al., 2002). Investor protection is defined as the legal protection of investors in a country causing that shareholders and creditors are better protected against adverse managerial behaviour (Veld & Veld-Merkoulova, 2004). Generally, countries with higher degrees of investor protection force companies to have a higher degree of corporate transparency, which reduce the information asymmetry between shareholder and executives (Durnev et al., 2009). In countries with a higher degree of investor protection, less of a firm’s profit will be expropriated by the executives, and more of a firm’s profit float to the investors
12 (La Porta et al., 2002). Veld and Veld-Merkoulova (2004) and Kolev (2016) argue that Anglo-Saxon countries, which are characterized by relatively high levels of investor protection, are more focused on shareholder value creation than countries of other corporate governance mechanisms.
Moreover, investor protection should shift the focus from short-term results to long-term value creation (Sternberg, 1992; Flammer & Bansal, 2017). According to Johnston and Morrow (2015), managers’ short-termism is based on relentless market pressure to maximize short-term shareholder returns. For example, Graham et al. (2005) found that corporate executives would sacrifice long-term net present value (NPV) generating projects if adopting these projects would result in the firm missing quarterly earnings expectations. Flammer and Bansal (2017) highlight a time-based agency problem in strategical decision making, which implicates that corporate executives and shareholders have misaligned time horizon preferences and hence misaligned interests. Investor protection tends to protect shareholders from adverse managerial behaviour and, therefore, the focus shifts from short-term to long-term interests.
2.2.2. Shareholdings of major shareholder
Kweh et al. (2020) defined shareholdings of major shareholder (i.e. largest shareholder shareholdings) as the percentage of shares owned by the largest shareholder. Jensen and Meckling (1976) argue that ownership is a factor that could influence an organization’s agency problem. Thomsen and Pedersen (2000) argue that large shareholders impacts an organization’s agency problem, because major shareholders with larger shareholdings have stronger incentives to monitor executives and have more power over executives, which increases executives’ tendency to maximize shareholder value. Bergh and Sharp (2015) argue that blockholders tend to be highly and frequently committed to their firms’ strategies and decision making. Kweh et al. (2020) describe that larger shareholders have stronger incentives to influence
decision-13 making. If an owner’s wealth might be impacted by a strategic decision, then these owners will most likely ensure their self-interests.
The general assumption is that all shareholders strive for maximizing shareholder value (Thomsen & Pedersen, 2000). Although the similar objective, the larger shareholder could be more influential and successful in pressuring a company’s management to meet their objectives than other (smaller) shareholders due to their higher degree of power (Bergh & Sharp, 2015). Garegnani et al. (2015) describe that relatively large shareholders are characterized by longer investment horizons. Therefore, these long-term shareholders have a longer period of time to amortize their monitoring costs (Harford et al., 2018).
3. Hypothesis development
3.1. The effect of corporate spin-offs on long-term shareholder value
A significant part of corporate spin-off literature posits that the divestiture is likely to have a positive effect on long-term shareholder value creation due to increased corporate focus (Cusatis et al., 1993; Daley et al., 1997; Desai & Jain, 1999), improved managerial incentives (Boreiko & Murgia, 2016; Feldman, 2016; Wachtell et al., 2016), reduced information asymmetry (Habib et al., 1997; Krishnaswami & Subramaniam, 1999), and improved corporate control (Cusatis et al., 1993; McConnell et al., 2001; Chemmanur & Yan, 2004; Chai et al., 2018). Moreover, some of the prior empirical findings indicate that corporate spin-offs have a positive effect on long-term shareholder value creation (Cusatis et al., 1993; Chai et al., 2018). In contrast, the literature highlights that corporate spin-offs are unlikely to create long-term shareholder value. For example, Wachtell et al. (2016) mention that a corporate spin-off could negatively impact the shareholder value due to (1.) loss of revenue and cost synergies, (2.) business disruptions as a result of the spin-off, (3.) separation costs, and (4.) reduced access to capital markets through smaller firm size. Moreover, Boreiko and Murgia (2016) describe that a corporate spin-off is a costly business divestiture transaction, which does not raise any
14 new external capital for one of the entities. Finally, Veld and Veld-Merkoulova (2004) and Zakaria and Arnold (2016) found no significant impact of corporate spin-offs on long-term shareholder value.
The arguments motivating that corporate spin-offs impact the long-term shareholder value are well-embedded in the literature, especially the positive impact of corporate spin-offs. However, the literature advances arguments motivating the negative impact of corporate spin-offs on long-term shareholder value. Therefore, given the above-mentioned evidence, I develop my first hypothesis, in an alternate form:
H1: Corporate spin-offs have an effect on long-term shareholder value.
3.2. Investor protection effect on the long-term shareholder value of corporate spin-offs Prior literature advocates that investor protection positively impacts shareholder value due to the improved (time-based) alignment between shareholders’ and executives interests (La Porta et al., 2002; Veld & Veld-Merkoulova, 2004; Flammer & Bansal; 2017) and reduced information asymmetry (Durnev et al., 2009).
In the context of corporate spin-offs, the level of investor protection could positively impact the long-term post-divestiture shareholder value creation depending on the alignment between the interests of shareholders and managers. Ahn and Walker (2007) describe that shareholders prefer a spin-off transaction because this should maximize their shareholder value, while managers do not want to engage in a spin-off transaction since they prefer larger and more diversified organizations. Bergh et al. (2008) describe that there might be information asymmetries in corporate divestitures, where executives could potentially manipulate earnings and costs, making investors vulnerable to adverse selection (e.g. hidden information) and/or moral hazard problems (e.g. hidden actions). Investor protection could therefore decrease these
15 information asymmetries due to increased transparency about the corporate spin-off transaction (Durnev et al., 2009).
However, Veld and Veld-Merkoulova (2004) found a significant negative impact of shareholder protection on the relationship between corporate spin-offs and long-term shareholder value creation. This finding is remarkable because this means that higher levels of investor protection are associated with lower long-term shareholder value of corporate spin-offs. Veld and Veld-Merkoulova (2004) provide three arguments for this finding. First, they argue that these findings could be explained by the theory that firms who engage in corporate spin-offs continue to maintain their shareholder-oriented policy over longer time periods. Second, in low investor protection countries the “average firm” which is used as a matching firm attempts to maximize the benefits for all stakeholders, while spin-off engaging firms are generally focused on shareholder value maximalization. Third, they argue that all firms in high investor protection countries are forced to act in shareholders’ interests. This implicates that spin-off engaging firm does not outperform the matched-firm because both act in shareholder’s best interest.
The argumentation that investor protection should have a positive impact on firm value due to improved interest alignment and reduced information asymmetry is well-grounded in the corporate governance literature. Therefore, I expect a positive moderating effect of investor protection on the relationship between corporate spin-offs and long-term shareholder value.
H2: Investor protection has a positive effect on the relationship between corporate spin-offs and long-term shareholder value.
3.3. Shareholdings of major shareholder effect on the long-term shareholder value of spin-offs Thomsen and Pedersen (2000) argue that large shareholders (i.e. large shareholdings of the major shareholder) could positively impact shareholder value by reducing the agency
16 problem because these larger shareholders have stronger incentives to monitor executives and have more power over executives, which increases executives’ tendency to maximize shareholder value. For example, Bergh and Sharp (2015) mentioned that large major shareholders have pressured managers to reverse slumping financial performance records by divestitures. Divestitures transform diversified companies (manager’s preference) to less diversified and higher-performing companies (shareholder’s preference) (Bergh, 1995). Compared to other divestiture methods, a corporate spin-off enables shareholders to manage their overall portfolio risk by the choice of holding or selling the shares of either the former parent entity or the spun-off entity, which is more consistent with shareholders’ self-interests (Bergh & Sharp, 2015).
A corporate spin-off reduces the monitoring costs of large shareholders due to improved transparency (Bergh et al., 2008). The reduced size and increased focus of both entities as a result of a corporate spin-off will lower the monitoring cost of the large shareholders due to lower levels of information asymmetry between executives and shareholders (Krishnaswami & Subramaniam, 1999). Furthermore, corporate spin-offs enable both entities (i.e. former parent and spun-off entity) to implement improved internal controls and more effective managerial incentive compensation schemes (Seward & Walsh, 1996). Summarized, major shareholders with large shareholdings will face lower monitoring costs and more power over executives after a corporate spin-off, which both imply that large shareholders could positively impact the long-term shareholder value creation of corporate spin-offs.
Although the theory assumes a positive effect of the shareholdings of major shareholder on the relationship between corporate spin-offs and long-term shareholder value, empirical findings of prior studies suggest the opposite. Cusatis et al. (1993) and Chai et al. (2018) found that respectively U.S. and Australian corporate spin-offs had a positive impact on the long-term shareholder value creation, while firms in both countries are characterized with relatively
17 smaller major shareholders (Dankova, 2006; Ahmad & Omar, 2016). In contrast, Veld & Veld-Merkoulova (2004) found that European corporate spin-offs have no significant impact on long-term shareholder value creation, while firms in European countries are characterized by larger shareholdings of the major shareholder (Dankova, 2006; Ahmad & Omar, 2016). Comparing the mutual results of these is not sufficient, because these studies have differences in methodology and time frame of research (Veld & Veld-Merkoulova, 2009).
Andres (2008) argues that having a major shareholder can imply drawbacks, because the major shareholder primarily represents its own interest, which could be negative for relatively smaller shareholders. Schleifer and Vishny (1997) show that a large shareholder might try to secure its private benefits by misusing its power at the expense of smaller shareholders. Furthermore, large shareholders could negatively affect firm value, because their large shareholdings negatively impact the stock liquidity (Edmans, 2009).
The argumentation that shareholdings of a major shareholders should have a positive impact on firm value due to improved incentives to monitor executives and improved power of major shareholders over executives is well-grounded in the corporate governance literature. Therefore, I expect a positive effect of shareholdings of a major shareholder on the relationship between corporate spin-offs and long-term shareholder value creation.
H3: Shareholdings of major shareholder has a positive effect on the relationship between corporate spin-offs and long-term shareholder value.
4. Data and methodology 4.1. The dataset
As described earlier, the focus of this research is on the long-term shareholder value effect of corporate spin-offs worldwide at the parent firm. Therefore, the dataset will consist of corporate spin-offs from different countries worldwide, which have been announced and completed in the time period 2000 and 2016. The final year will be 2016, because this enables
18 me to include the most recent data regarding the abnormal stocks returns for 6, 12, 24, and 36 months after the corporate spin-off execution (Veld & Veld-Merkoulova, 2009). Previous single-country studies related to the long-term shareholder value creation of corporate spin-offs had a sample time period of 13 to 23 years (Veld & Veld-Merkoulova, 2009). Due to the worldwide scoping of this research and increasing knowledge about corporate spin-offs besides the U.S., the time period of this research could be shorter. Therefore, I choose 2000 as the starting point of my data collection. Table 2 provides an overview of companies worldwide that announced and completed a corporate spin-off in the period from 2000 to 2016 per country.
Following Veld and Veld-Merkoulova (2004), corporate spin-offs will be excluded when the parent firm announces two or more spin-offs in one announcement. Moreover, Veld and Veld-Merkoulova (2004) eliminate corporate spin-offs from their sample when the spun-off entity was formerly owned by two parent companies. Third, countries with less than three corporate spin-off transactions will be eliminated from the sample because they are not representative for a country. Finally, some corporate spin-offs will be eliminated from the sample based on data limitations regarding the dependent and control variables. Due to these data limitations, Hypothesis 2 and 3 will be tested on dataset on the period from 2006 to 2016. The tables 10 and 14 provide an overview of companies worldwide that announced and completed a corporate spin-off in the period from 2006 to 2016 per country and for which firms there is data available concerning respectively investor protection and shareholdings of major shareholder(s).
4.2. The methodology
To test Hypothesis 1, the methodology is based on the methodology of prior research by Woo et al. (1992). Woo et al. (1992) compared the performance before and after the corporate divestiture. Prior studies of Cusatis et al. (1993), Veld and Veld-Merkoulova (2004),
19 Zakaria and Arnold (2016), among others, used the (cumulative) abnormal stock returns as measurement of long-term shareholder value. Queen (2015) argues that value-driven measures of firm performance have gained interest as a benchmark for shareholder value creation, because value-based measures are used to influence corporate executives to direct policy towards creating long-term shareholder value. Stock returns (i.e. shareholder returns) measure the stock performance for a given period, whereby the stock returns are calculated by the share price appreciation/depreciation including dividends and is expressed in a percentage (Queen, 2015). Veld and Veld-Merkoulova (2009) provided in their study an overview that indicates that prior studies have an event window up to 6, 12, 24, and 36 months after the corporate spin-off. This study focuses on the post-spin-off period of 1, 2, 3, 4, and 5 years for the first hypothesis, next to the commonly accepted periods of 6, 12, 24, and 36 months as post-spin-off study periods. I use the following regression model (equation 1) to research the impact of corporate spin-offs on firms’ yearly stock returns;
(1.) 𝑌𝑒𝑎𝑟𝑙𝑦𝑆𝑡𝑜𝑐𝑘𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 = 𝛽0 + 𝛽0 + 𝛽1𝑌𝑒𝑎𝑟𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡+ 𝛽2𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝐹𝑜𝑐𝑢𝑠 𝑖+ 𝛽3𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑖∗ 𝑌𝑒𝑎𝑟𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 −
𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡+ 𝛽4𝐺𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑖𝑐𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑐 + 𝛽5𝐺𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑖𝑐𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑐∗
𝑌𝑒𝑎𝑟𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡 + 𝛽6𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑡−1,𝑖,𝑐 +
𝛽7𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐 + 𝛽8𝑅𝑒𝑡𝑢𝑟𝑛𝑂𝑛𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐 + 𝜀
The yearly stock returns are calculated as the cumulative effect of monthly returns of the previous twelve months. The monthly stock returns are calculated as the share price increase/decrease compared to the share price of the previous month, taking into account cash equivalent distributions to shareholders, the reinvestment of dividends, and the compounding effect of dividends paid on reinvested dividends.6 The variable ‘Years#afterSpin-offCompletionDummy’ equals 1 if the data is about 1, 2, 3, 4, or 5 years after a corporate
20 off. For example, the ‘Years3afterSpin-offCompletionDummy’ indicates the pre-spin-off period with 0 and the 1 to 3 years post-spin-off period with 1. The first partial year, in which the spin-off have been executed, will be counted as the first year (year 1). Earlier research related to the short- and long-term shareholder value creation effect of corporate spin-offs showed that corporate spin-off characteristics, such as (1.) industrial focus increment, and (2.) geographical focus increment influence the shareholder value creation of corporate spin-offs. Therefore, I included these as stand-alone and interaction variables. Furthermore, I control for leverage, total assets, and return on assets. Finally, dummy-variables for year, industry, and country of the parent firm have been included to control for their effect on yearly stock returns. Table 1 provides an overview of the measurements and calculations of all the variables.
As mentioned earlier, the commonly accepted research periods of corporate spin-offs are 6, 12, 24, and 36 months post-spin-off (Veld and Veld-Merkoulova, 2009). Therefore, I also focus on the stock returns up to 6, 12, 24, and 36 months after the corporate spin-off at the level of the parent. Equation 2 shows the regression model used to research the impact of corporate spin-offs on long-term shareholder value creation, which is measured by monthly stock returns; (2.) 𝑀𝑜𝑛𝑡ℎ𝑙𝑦𝑆𝑡𝑜𝑐𝑘𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 = 𝛽0 + 𝛽1𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡+
𝛽2𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝐹𝑜𝑐𝑢𝑠 𝑖+ 𝛽3𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑖∗ 𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 −
𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡+ 𝛽4𝐺𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑖𝑐𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑐 + 𝛽5𝐺𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑖𝑐𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑐∗
𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡 + 𝛽6𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑡−1,𝑖,𝑐 +
𝛽7𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐 + 𝛽8𝑅𝑒𝑡𝑢𝑟𝑛𝑂𝑛𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐 + 𝜀
As mentioned earlier, the monthly stock returns are calculated as the share price increase/decrease compared to the share price of the previous month, taking into account cash equivalent distributions to shareholders, the reinvestment of dividends, and the compounding effect of dividends paid on reinvested dividends. The variable ‘Months#afterSpin-offCompletionDummy’ equals 1 if the data is about 6, 12, 24, or 36 months after a corporate
21 spin-off. For example, the ‘Months6afterSpin-offCompletionDummy’ indicates the pre-spin-off period with 0 and the 1 to 6 months post-spin-pre-spin-off period with 1. The first partial month, in which the spin-off have been executed, will be counted as the first month (month 1). In line with the first equation, the second equation controls for (1.) industrial focus increment, (2.) geographical focus increment, (3.) leverage, (4.) total assets, and (5.) return on assets. Finally, dummy-variables for year, industry, and country of the parent firm have been included to control for their effect on monthly stock returns. Table 1 provides an overview of the measurements and calculations of all the variables.
In order to test the second and third hypotheses, my methodology is based on prior research of Zakaria and Arnold (2016). My second hypothesis refers to cross-country investor protection, which is measured by the Strength of Investor’s Protection Index for each country. The Strength of Investor’s Protection Index is measured by the World Bank and represents three sub-categories of investor protection, which are (1.) the Ease of Shareholder Suits Index, (2.) the Extent of Director Liability Index, and (3.) the Extent of Disclosure Index. This index can take a value between 0 and 30, whereby 0 indicates a low level of investor protection, while 30 indicates a high level of investor protection. Investor protection is interacted with the variable ‘Months#afterSpin-offCompletionDummy’ to test the moderating effect of investor protection. The impact of Investor Protection on the shareholder value creation of corporate spin-offs, which is measured by the monthly stock returns, is calculated in the second equation. Like the test for the first hypothesis, the control variables will be (1.) industrial focus increment (2.) geographical focus increment, (3) leverage, (4.) total assets, and (5.) return on assets. As for hypothesis 1, dummy-variables for year, industry, and country of the parent firm have been included to control for their effect on monthly stock returns. Based on the study of Zakaria and Arnold (2016), I developed equation 3 to test Hypothesis 2.
22 (3.) 𝑀𝑜𝑛𝑡ℎ𝑙𝑦𝑆𝑡𝑜𝑐𝑘𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 = 𝛽0 + 𝛽1𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡+
𝛽2𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑃𝑟𝑜𝑡𝑒𝑐𝑡𝑖𝑜𝑛𝑡,𝑐+ 𝛽3𝐼𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑃𝑟𝑜𝑡𝑒𝑐𝑡𝑖𝑜𝑛𝑡,𝑐∗ 𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡 + 𝛽4𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝐹𝑜𝑐𝑢𝑠 𝑖+ 𝛽5𝐺𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑖𝑐𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑐 + 𝛽6𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑡−1,𝑖,𝑐 + 𝛽7𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐 + 𝛽8𝑅𝑒𝑡𝑢𝑟𝑛𝑂𝑛𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐+ 𝜀
The third hypothesis refers to the impact of the shareholdings of the major shareholder, which is measured by the percentage of ownership by the largest shareholder before the corporate spin-off (Kweh et al., 2020). In order to test the third hypothesis, I developed the third equation. The variable ‘Major shareholder shareholdings’ is interacted with the variable ‘Months#afterSpin-offCompletionDummy’ to test the moderating effect of the ownership structure. In this fourth equation, I use the same control variables as in equations 1, 2, and 3. Based on the study of Zakaria and Arnold (2016), I developed equation 4 to test Hypothesis 3. (4.) 𝑀𝑜𝑛𝑡ℎ𝑙𝑦𝑆𝑡𝑜𝑐𝑘𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡 = 𝛽0 + 𝛽1𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡+
𝛽2𝑀𝑎𝑗𝑜𝑟𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠𝑡,𝑖,𝑐+ 𝛽3𝑀𝑎𝑗𝑜𝑟𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑠𝑡,𝑖,𝑐∗
𝑀𝑜𝑛𝑡ℎ𝑠#𝑎𝑓𝑡𝑒𝑟𝑆𝑝𝑖𝑛 − 𝑜𝑓𝑓𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛𝐷𝑢𝑚𝑚𝑦𝑡 + 𝛽4𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑖𝑎𝑙𝐹𝑜𝑐𝑢𝑠 𝑖+
𝛽5𝐺𝑒𝑜𝑔𝑟𝑎𝑝ℎ𝑖𝑐𝑎𝑙𝐹𝑜𝑐𝑢𝑠𝑐 + 𝛽6𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑡−1,𝑖,𝑐 + 𝛽7𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐 + 𝛽8𝑅𝑒𝑡𝑢𝑟𝑛𝑂𝑛𝐴𝑠𝑠𝑒𝑡𝑠𝑡−1,𝑖,𝑐+ 𝜀
To increase the reliability of this research, additional tests will be performed. In additional analyses, long-term shareholder value will be measured by Tobin’s Q (Gande et al., 2009) and Return on Assets (ROA) (Daley et al., 1997; Sudersanam & Qian, 2007) on a yearly and monthly level. An additional test with change in monthly Tobin’s Q will also be performed. Hawn and Ioannou (2016) calculated Tobin’s Q as the sum of market capitalization and total liabilities divided by the total assets. ROA is measured as the ratio of earnings before interest, tax, depreciation and amortization (EBITDA) to book value of assets (Sudersanam & Qian, 2007). Important note, accounting-based measures could be susceptible to manipulation (Queen, 2015). As a robustness test for the second hypothesis, investor protection will be
23 replaced by the legal system. Generally, common law countries are characterized by higher degrees of investor protection (McLean et al, 2012). Finally, the dummy variables blockholder (Bergh, 1995) and majority shareholder (Holderness & Sheehan, 1988) will be used as robustness tests for the third hypothesis. A blockholder is a shareholder that holds at least 5 percent of a company’s shares (Bergh, 1995), while a majority shareholder is a shareholder that owns more than 50 percent of a company’s shares (Holderness & Sheehan, 1988).
5. Empirical results
The empirical results of this paper are structured as follows. Each question/hypothesis will be tested individually, whereby first the descriptive statistics will be provided. Second, the empirical results of the main test will be described. Finally, the results of the additional/robustness test with regard to that hypothesis will be described.
5.1.Hypothesis 1: Corporate spin-offs and long-term shareholder value
Table 2 provides an overview of companies worldwide that announced and completed a corporate spin-off in the period from 2000 to 2016 per country. Table 3 shows the descriptive statistics regarding the main variables for the first hypothesis in the time period. On a yearly level, the average return is 20.503 with a standard deviation of 69.938. The control variables leverage, log of total assets, and return on assets have on a yearly level a mean of respectively 0.517 (SD=0.257), 8.197 (SD=3.668), and 7.919 (SD=12.347). Furthermore, Tobin’s Q on a yearly level has a mean of 2.278 with a standard deviation of 4.261. The average monthly stock return is 1.745 with a standard deviation of 18.951. The means of the monthly leverage, the monthly log of assets total, and the monthly return on assets are respectively 0.518 (SD=0.257), 8.213 (SD=3.664), and 7.983 (SD=12.232). For the robustness tests, the mean of the monthly Tobin’s Q and the monthly delta of Tobin’s Q is respectively 2.164 (SD=3.722) and 0.527 (SD=11.115). Finally, roughly 60% of the corporate spin-offs in the sample of 257 were
24 industrial focus increasing spin-offs, while roughly 2% of the spin-offs were geographical focus increasing.
Table 4 shows the results of Hypothesis 1 on a yearly basis. The results show, after controlling for the control variables, that the long-term shareholder value measured by yearly stock returns is insignificantly affected by a corporate spin-off for the 1, 2, and 4 years post-spin-off periods. However, the yearly stock returns are significantly negatively affected by the corporate spin-off in the 3 and 5 years post-spin-off periods. Interestingly, the results show that geographical focus increasing spin-offs significantly negatively affect the relationship between corporate spin-offs on long-term shareholder value creation in the periods of 1, 2, and 3 years post-spin-off periods (columns 1-3, table 4).
Table 5 shows the results of Hypothesis 1 on a monthly basis. These results show, after controlling for the control variables, that the long-term shareholder value measured by monthly returns is insignificantly affected by a corporate spin-off for the first 6 (P = 0.924) and 12 (P = 0.240) months post-spin-off periods. However, the monthly returns are significantly negatively affected by the corporate spin-off up to the first 24 (P = 0.014) and 36 (P = 0.033) months post-spin-off periods. This implicates that corporate post-spin-offs do not have a significant impact on long-term shareholder value in the first 6 and 12 months after the spin-off completion, while they negatively impact long-term shareholder value over the 24 and 36 months after the spin-off completion. These findings regarding monthly stock returns are in line with the findings regarding yearly stock returns. Both show a negative impact of corporate spin-offs on long-term shareholder value, which becomes significant after longer post-spin-off periods. Concerning the control variables, the results show a significant impact of the variables Leverage and Return on Assets. Finally, the control variable Geographical Focus shows only a slightly significant negative influence in the 6 and 36 months post-spin-off periods.
25 Table 6 shows the results regarding the robustness test of Hypothesis 1 on a yearly level, whereby long-term shareholder value is measured by yearly levels of Tobin’s Q. The yearly Tobin’s Q is insignificantly affected by the corporate spin-off in the 1, 2, and 3 years post-spin-off periods. Nonetheless, the results show that the yearly Tobin’s Q is significantly negatively affected by the corporate spin-off in the 4 and 5 years post-spin-off periods. These findings are comparable with yearly stock return findings in terms of coefficient, but the findings differ in terms of significance in the 3 and 4 years post-spin-off periods.
Table 7 shows the results regarding the robustness test of Hypothesis 1 on a monthly level. In these robustness analyses is long-term shareholder value measured by monthly Tobin’s Q (see columns 1-4) and by the change in monthly’s Tobin’s Q (see columns 5-8). The robustness analysis with the measurement monthly Tobin’s Q shows comparable results to the monthly stock returns for 36 months post-spin-off period, which is significantly negative. Compared to table 5, the results of table 7 column 3 show that the long-term shareholder value, measured by monthly Tobin’s Q, is insignificantly affected by a corporate spin-off for the 24 months post-spin-off period. In the case that long-term shareholder value is measured by the change of Monthly’s Tobin’s Q (columns 5-8), the analysis shows that in all post-spin-off periods long-term shareholder value is significantly negatively affected by a corporate spin-off. Interesting is also the significant positive impact of the interaction between industrial focus and the 24 and 36 months post-spin-off periods. This implicates that firms that engage in industry focus increasing spin-offs, spin-offs do create significantly more long-term shareholder value in the 24 and 36 months post-spin-off periods.
The results of the robustness test using the yearly return on assets (ROA) as a measurement for long-term shareholder value creation are provided in Table 8. In all the five post-spin-off periods (i.e. 1, 2, 3, 4, and 5 years), the results do not show an effect of corporate spin-offs on long-term shareholder value. However, the results are comparable to the prior tests
26 because all tests suggest, based on the negative coefficient, a negative impact of corporate spin-offs on long-term shareholder value creation.
Finally, Table 9 shows the regression output of robustness tests using monthly ROA as a measurement for long-term shareholder value. In all the four post-spin-off periods (i.e. 6, 12, 24, and 36 months), the results do not show an effect of corporate spin-offs on long-term shareholder value. However, the results are comparable to the prior tests because all tests suggest, based on the negative coefficient, a negative impact of corporate spin-offs on long-term shareholder value creation. All in all, the empirical tests show support for the first hypothesis.
5.2. Hypothesis 2: The moderating effect of investor protection
Table 10 provides an overview of companies worldwide that announced and completed a corporate spin-off in the period from 2006 to 2016 per country. Compared to the overview provided in Table 2, the sample is roughly 100 observations smaller due to dropping the years 2000 to 2005, as the Worldbank does not have data concerning the Strength of Investor Protection Index available for the years before 2006.
Table 11 shows the descriptive statistics regarding the main variables for the reduced sample (given in Table 10) for the second hypothesis. The mean, standard deviation, minimum, and maximum of the variables (1.) stock returns, (2.) leverage, (3.) log of total assets, and (4.) return on assets on monthly level for the sample given in Table 10 is comparable to descriptive statistics given in Table 3. The average score on investor protection is roughly 22.3 with a standard deviation of roughly 3.7. Furthermore, roughly 78 percent of the spin-off engaging parent firms have been incorporated in common law countries. Finally, roughly 56 percent of the corporate spin-offs in the sample of 355 were industrial focus increasing spin-offs, while roughly 3 percent of the spin-offs were geographical focus increasing.
27 The empirical results of equation 2 are provided in Table 12. I find, after adding the country-level moderator investor protection, the long-term shareholder value is insignificantly affected by corporate spin-offs for the 6, 12, 24, and 36 months post-spin-off periods. This finding contrasts with the results regarding Hypothesis 1, where I found a significant negative impact of corporate spin-offs on long-term shareholder value for the 24 and 36 months post-spin-off periods. Furthermore, the results show higher levels of investor protection do not have a significant effect on the relationship between corporate spin-offs and long-term shareholder value over all four post-spin-off periods (i.e. 6, 12, 24, and 36 months).
Table 13 provides the results of the additional analysis for the second equation. In this additional analysis, investor protection is replaced by the type of legal system because generally common law countries are characterized by higher degrees of investor protection. By adding the country-level moderator common law dummy, the results are comparable in the case of adding the country-level moderator investor protection (Table 12). This implicates that the long-term shareholder value is insignificantly affected by corporate spin-offs for the 6, 12, 24, and 36 months post-spin-off periods. More interesting, the results show that firms incorporated in countries with common law as legal system affect the relationship between corporate spin-offs and long-term shareholder value significant negative in the 6 and 24 months post-spin-off periods (Table 13, columns 1 and 3). This implicates that the long-term shareholder effect of corporate spin-offs becomes more negative if the parent firms are incorporated in a common-law country for the periods of 6 and 24 months after spin-off execution. On the other hand, firms incorporated in common law countries insignificantly impact the relationship between corporate spin-offs and long-term shareholder value in the 12 and 36 months post-spin-off periods (Table 13, columns 2 and 4).
28 5.3. Hypothesis 3: The moderating effect of shareholdings of major shareholder
Table 14 provides an overview of companies worldwide that announced and completed a corporate spin-off in the period from 2006 to 2016 per country and the data regarding the shareholdings of major shareholder is available. The Orbis database had from the parent firms that engage in a corporate spin-off for 176 firms data available. Therefore, my sample is roughly 180 and 80 spin-offs smaller compared to respectively the number of spin-off in the sample of the first hypothesis (Table 2) and the second hypothesis (Table 10).
Table 15 shows the descriptive statistics regarding the main variables for the reduced sample (given in Table 14) for the third hypothesis. The mean, standard deviation, minimum, and maximum of the variables (1.) stock returns, (2.) leverage, (3.) log of total assets, and (4.) return on assets on monthly level for the sample given in Table 14 is comparable to descriptive statistics given for the first (Table 3) and second hypothesis (Table 9). The average shareholdings of the major shareholder, measured by the percentage of shares held by the largest shareholder, is 22.13 percent with a standard deviation of 18.756. Roughly 89% of the observation there is a blockholder (i.e. shareholder who hold 5% or more of the shares) at a given period, while in 8.5% of the observations there is a majority shareholder (i.e. shareholder who hold 50% or more of the shares) at a given period. Finally, roughly 44 percent of the corporate spin-offs in the sample of 176 were industrial focus increasing spin-offs, while roughly 3 percent of the spin-offs were geographical focus increasing.
The results of equation 3 are provided in Table 16. I find, after adding the firm-level moderator shareholdings of the major shareholder, the long-term shareholder value is significantly negatively affected by corporate spin-offs for the 36 months post-spin-off period. This empirical result is in line with the results concerning the first hypothesis. On the other hand, the long-term shareholder value is insignificantly affected by corporate spin-offs for the 6, 12, and 24 months post-spin-off periods when adding the firm-level moderator shareholdings
29 of the major shareholder. The finding concerning the 24 months post-spin-off period contrasts with the findings of Hypothesis 1, where I found a significant negative impact of corporate spin-offs on long-term shareholder value for the 24 and 36 months post-spin-off periods. Furthermore, the results show that spin-off engaging firms with larger shareholdings of a major shareholder do not have a significant effect on the relationship between corporate spin-offs and long-term shareholder value in each of the post-spin-off periods (i.e. 6, 12, 24, 0r 36 months).
In Table 17, the additional analysis concerning the third equation is provided. In this test, the variable Majority Shareholder is used as an additional measurement for shareholdings of the major shareholder. The Majority Shareholder is a dummy variable that indicates 1 when the major shareholder owns at least 50% of the shares. In the case the variable Majority Shareholder is included in the equation, the results are comparable to the results found for equation 1. These results confirm that corporate spin-offs have a significant negative effect on the long-term shareholder value in the 24 and 36 months post-spin-off periods. Column 2 of Table 17 shows majority shareholders significantly negatively affect the relationship between corporate spin-offs and long-term shareholder value in the 12 months post-spin-off period. For the other post-spin-off period, there was no empirical evidence that the majority shareholder affected the relationship between corporate spin-offs and long-term shareholder value. Finally, an additional analysis with blockholder as a measurement for shareholdings of the major shareholder, whereby blockholder is a dummy variable that indicates 1 when the major shareholder holds at least 5% of the shares, did not show any significant results for any post-spin-off period.
6. Conclusion
Several studies researched the shareholder value effects associated with corporate spin-offs. Most prior studies focused on the short-term effects of corporate spin-offs around the
30 announcement date, while studies incorporating the long-term shareholder value impact of corporate spin-offs are limited (Veld & Veld-Merkoulova, 2009). Furthermore, current evidence concerning the long-term shareholder value creation of corporate spin-offs is largely restricted to the United States and, to a lesser extent, European countries (Chai et al., 2018). The previous studies show conflicting results on how corporate spin-offs affect long-term shareholder value. Comparing the results of prior studies is inadequate due to differences in time frames and methodology used in these studies. This study provides evidence of the long-term shareholder value effects of corporate spin-offs at the level of the parent firm by a worldwide sample.
I found that corporate spin-offs are negatively associated with long-term shareholder value creation, which is measured by yearly stock returns, at the parent level for the 3 and 5 years post-spin-off periods. For the periods of 1, 2, and 4 years post-spin-off periods, I found no empirical support. Tests with monthly stock returns as the measurement of long-term shareholder value creation showed that corporate spin-offs are negatively associated with long-term shareholder value for the 24 and 36 months post-spin-off periods at the parent firm. I found no empirical support for the earlier post-spin-off periods (i.e. 6 and 12 months). Veld and Veld-Merkoulova (2009) showed that the long-term performance of corporate spin-offs is often not significant. Nonetheless, Cusatis et al. (1993) found that corporate spin-offs in the U.S. positively impact long-term shareholder value. Due to the significance levels after 24 and 36 months, there is a possibility that disadvantages of corporate spin-offs are only recognized by the market at a later stage (Chai et al., 2018). These possible disadvantages of corporate spin-offs could be (1.) loss of revenue and cost synergies, (2.) business disruptions as a result of the spin-off, (3.) separation costs, and (4.) reduced access to capital markets through smaller firm size (Wachtell et al., 2016).
31 Additional analyses used (1.) yearly Tobin’s Q, (2.) monthly Tobin’s Q, (3.) change in monthly Tobin’s Q, (4.) yearly ROA, and (5.) monthly ROA as alternative measurements of long-term shareholder value creation. The additional analyses with yearly Tobin’s Q, monthly Tobin’s Q, and change in monthly Tobin’s Q show a significant negative effect of corporate spin-offs on long-term shareholder value. These findings are comparable with the findings regarding yearly and monthly stock returns and, therefore, tend to support the suggestion that the disadvantages of corporate spin-offs might be recognized in a later stage, as suggested by Chai et al. (2018). The empirical results with yearly and monthly ROA as the measure of long-term shareholder value creation are negative, but these results lack significance over all the post-spin-off periods.
In this paper, I aimed to explore the relationship between corporate spin-offs and long-term shareholder value creation by including investor protection as a country-level moderating variable. Several regression tests did not show that investor protection significantly affected the relationship between corporate spin-offs and long-term shareholder value creation. McLean et al. (2012) mentioned that common law countries tend to have stronger investor protection than code law countries. Therefore, I ran a robustness analysis whereby I replaced investor protection with the Common Law dummy variable. While I did not find a systematically significant moderating effect of investor protection, but I found that common law countries do have a significant negative effect on the relationship between corporate spin-offs and long-term shareholder value for the 6 and 24 months post-spin-off periods. Veld and Veld-Merkoulova (2004) found also an insignificant impact of shareholder rights on the one-years excess returns of corporate spin-offs, while they found that shareholder rights significantly negatively affect the two-year excess returns of corporate spin-offs at the parent firm.
Veld and Veld-Merkoulova (2004) provided three arguments about why better investor protection should not impact the relation between corporate spin-offs and long-term shareholder
32 value. First, they argue that these empirical results might be explained by the theory that spin-off engaging firms continue to maintain their shareholder-oriented policy over longer periods. Second, spin-off engaging firms compared to non-spin-off engaging firms in the same country are generally more focused on shareholder value maximization. Third, firms incorporated in countries with high levels of investor protection are forced by legislation to act in shareholders’ best interests. Another explanation might be that stock-listed firms are imposed by the stock exchanges and regulators to have high levels of disclosure (Leuz & Wysocki, 2016), scrutiny (Kolev et al., 2008), and auditing (Kleinman et al., 2014). In line with this, Habib et al. (1997) mention that stock exchanges expect additional disclosure about the separated entities in the spin-off announcement to enable the capital market to evaluate the corporate spin-off. Compared to the study of Veld and Veld-Merkoulova (2004), my study did not use the matched-firm method and therefore the third argument might not be suitable as an explanation in this study. The other arguments could probably declare why cross-country differences in investor protection did not affect the relationship between corporate spin-offs and long-term shareholder value.
Finally, I studied the impact of the shareholdings of the major shareholder on the relationship between corporate spin-offs and long-term shareholder value creation. I did not obtain any statistically significant support for my third hypothesis over all four post-spin-off periods (i.e. 6, 12, 24, and 36 months), which stated that shareholdings of the major shareholder have a positive effect on the relationship between corporate spin-offs and long-term shareholder value creation. These results are robust in the case that the variable ‘shareholdings of major shareholder’ is replaced with the variable blockholder, which is a dummy variable that indicates when the largest shareholder owns 5 percent of the shares. In the final additional analysis is shareholdings of the major shareholder measured by the majority shareholder, which is measured by a dummy variable that indicates whether the major shareholder owns more than
