Do you know who I am? The market performance impact of keeping the parent brand name after a spin-off

(1)

Do you know who I am? The market performance

impact of keeping the parent brand name after a

spin-off

Abstract

Corporate spin-offs represent an important corporate divestiture, as a parent firm separates one of its divisions in a standalone entity. Extant literature brings conflicting evidence regarding the equity market effects of the spin-off. This study analyzes whether keeping the brand name after a spin-off increases the market valuation of the parent and the spun-off entity. To test my expectations I use a sample of 142 US parent firms, and 52 US spun-off firms. Main results indicate that maintaining the brand name of the parent is associated with negative market performance for both parent and spun-off. In further tests, I assess if the brand name effects vary for a focus increasing or non-focus increasing spin-off and for larger firms. Results indicate that both size and a focusing spin-off have a positive moderating effect, since they are associated with benefits stemming from the spin-off. Overall, my results indicate that the market negatively prices brand extensions between parent firms and spun-offs, yet the effect is smaller for larger companies and focusing divestitures.

Key words: spin-offs, divestures, market performance, brand extension, brand

equity, long-term performance

JEL classification: G14, G32, G34, M37

Supervisor: Vlad A. Porumb Student number: 2507846 Name: Florine H.G.C. van Benthem Address: Dunantstraat 37a, 3024BB Rotterdam

Phone number: +31 651563410 E-mail: f.h.g.c.van.benthem@student.rug.nl

Word count: 6739

(2)

1 Introduction

The divestment of a subsidiary or a division can take place in many ways. While a common sell-off represents the sale of some assets of an entity, a spin-off is generically defined as the proportional distribution of the stake to existing shareholders (Kong Chow and Hamilton, 1993 via Bhat and Burg, 2011). I build on previous literature to consider the spin-off as a method to divest from unrelated businesses, where a parent entity is divided into smaller independent units (Ferreira, Reis, Paula and Pinto, 2017). Given the prevalence of spin-offs as a worldwide corporate divestiture method, it represents the central focus of my thesis. A firm might undergo a spin-off to focus on one specific line of business or market segment1 – the

most common motivation for spin-off is to unlock shareholder value since a spin-off can be a way to jettison underperforming business. Specifically, separating the assets of parent and spun-off entities can enable the component parts to reach higher values than if they do not separate (CFA, 2018).

Recently, public companies going through divestitures have referenced to this effect. For example, Hewlett Packard claims that its separation into independent publicly traded companies provide each entity with its own, more focused equity currency, and investors have the opportunity to invest in two companies with compelling and unique financial profiles well suited to their respective business (HP, October 6, 2014). Moreover, the German technology conglomerate Siemens announced to spin-off their average energy division as response to a bad quarter in 2018. The stock market reacted enthusiastic on the news that an initial public offering (IPO) is planned in the fall of 2020 (Financieel Dagblad, May 8, 2019). It is nonetheless striking that this new entity will be called ‘Siemens Energy’, given its low performance (Power

1 A spin-off is committed to concentrate on a smaller part of your business, motivation can be to be focus increasing, or to get rid of a not well performing asset. This is expected to have different impacts on the market performance. A spin-off removes obstacles since the parent and the spin-off possess different business, financial and growth attributes (Practicallaw.com, June 2015).

(4)

Engineering International, October 17, 2019). In contrast, Philips Lighting, the 2016 spun-off of Philips, ended their brand reference by changing its name to Signify (Signify, May 16, 2018). On September 19, 2019, Philips sold their remaining shares in Signify, and with that the involvement of Philips came to an end. The economic significance and contrasting effects of spin-offs in terms of market reaction led to a significant interest from scholars for the type of divesture.

Academic studies therefore assess the impact of the divesture on shareholders wealth, corporate diversification, and stock market reactions (Ferreira et al., 2017). Cusatis, Miles and Woolridge (1993) were the first to examine the stock market effect on both the parent and the spun-off, also in the period following the distribution of shares and document a positive market reaction. Veld and Veld-Merkoulova (2009) reinvestigate Cusatis et al. (1993) and disprove their results, finding decreases in the long-run performance after the spin-off announcement. Some studies in the literature found positive post spin-off returns (Cusatis, 1993, Desai and Jain, 1999, Vijh, 1994).2 Cusatis (1993) suggests that spinning off is a low-cost method to

transfer control of assets to bidders who will create greater value, a corporate restructuring activity. Spin-offs create value by eliminating negative synergies (Hite and Owers, 1983). According to Chai, Lin and Veld (2018) spinning of a subsidiary makes it easier to be acquired.

Others studies documented negative post-spin-off returns (Brown and Brooke, 1993, Arbarbanell, Bushee and Raedy, 2003). Veld and Veld-Merkoulova’s (2009) only found positive results during the announcement date. Murray (2008) found that net gains for shareholders from a spin-off announcement only happen when it will be focus increasing. The findings are quite dated and different periods are investigated, so no generalization can be made.

(5)

Overall, Chai, Lin and Veld (2018) state that current research is limited and there is no unified explanation on if or why a spin-off would create value for shareholders.3

One of the recent themes advanced by the literature is that spun-offs are likely to be associated with brand equity. As Veld and Veld-Merkoulova (2009, 418) question: Given the

positive effects of spin-offs, why do conglomerates keep many unrelated divisions under the same brand name?. While insightful, the only study to date that took brand extension as a

determinant of spin-off success is Bhat and Burg (2011).4 When performing a spin-off,

obtaining a favorable market valuation is a major objective. Surprisingly, there is only little literature to guide managers whether they should associate the spun-off with the brand equity or not. This while executing spin-offs is proven to be popular in the last two decades, in contrast to the conglomeration period from before.

Previous studies do not assess the market performance effect of maintaining the name

of the parent in the post-spin-off period. This is an important omission, since a spin-off

ultimately involves the creation of a new corporate brand (Bhat and Burg, 2011). With a spin-off, both the parent and the subsidiary trade as separate entities subsequent to the spin-off and, therefore, their performance can be analyzed separately (Desai and Jain, 1999). My thesis addresses this important gap in the literature and looks into the effect of the brand extension on the market performance of the parent and the spun-off. Specifically, I ask if the market performance reacts positively or negatively to spinning off contingent on the spun-off maintaining the brand of the parent. It is the first study looking at the effect on maintaining the brand name for both the parent and the spun-off, from the announcement date till one year

3 Possible sources are the improvement of industrial or geographical focus and the reduction of information asymmetry.

4 My work differs from Bhat and Burg (2011) because they only look at the spun-off value and compare the change with the S&P change. I look at the parent and the spun-off value, and compare the change with each other. We both have a time window of one year as long-term time period. And we both see whether

communicating the brand equity has influence on the market performance. However, they talk about brand heritage in the form of the name, slogan or other reference. I only look at the brand name.

(6)

afterwards. It combines the brand extension with focusing or non-focusing spin-offs and the parent size. This study specifies the long-term aspect with one moment; one year later, in order to make a clear comparison. Lastly, it is unique since it uses recent data, between 2000 and 2020, of United States (US) companies.

To test my contentions, I assess the market performance effect between the day of public announcement of a spin-off to one year afterwards. Because at the announcement date a very detailed document with financial statements is published, shareholders are given a lot of information. I chose to use a one year period window around the spin-off, since a shorter period may be inadequate to show any effect on investors, and with a longer period investors may place more emphasis on factors specific to that spun-off such as industry, competition, changes in the operating environment and management and rely less on parent brand equity (Bhat and Burg, 2011). I use spin-off information from the SDC Platinum database in the 2000 to 2020 period and financial from Compustat North America. Further, I hand-code brand extension information, by manually assessing the similarity between the brand of the parent company and the spun-off firm in the post-spin-off period. The data selection process results in a final sample size of 142 for parents and 52 for spun-offs, since the data of companies which have had a spin-off and the information of their market performance is limited. Results suggest that if the spun-off company maintains the brand name of the parent is perceived negatively by the market for the parent and is associated with lower Tobin’s Q, returns and prices. In further tests I assess if the brand extension effects vary for a focus increasing or non-focus increasing spin-off and for larger firms. I find that both size and a focusing spin-off have a positive moderating effect, since they are associated with benefits stemming from the spin-off. These results are in line with Campbell, Ettredge, Guo and Wiebe (2019), since both firm size and focusing spin-offs represent contingencies that increase the usefulness of the spun-off, as perceived by shareholders. For spun-offs, brand extension has a small negative effect on the market

(7)

performance based on prices. Here, focusing has a positive moderating effect as well. Overall, my results indicate that the market negatively prices brand extensions between parent firms and spun-offs, yet the effect is smaller for focusing divestitures and larger companies.

The rest of my thesis is structured as follows: first spin-off characteristics are discussed, followed by a theoretical background based on the stewardship theory. Afterwards, related literature will be reviewed in order to develop the Hypotheses. When the Hypotheses are brought forward, the method will be shaped and the Hypotheses will be tested, which turns out in the results. These results will be discussed, conclusions will be made and suggestions for further research will be presented.

2 Spin-off characteristics & Theoretical background

2.1 Spin-off characteristics

A spin-off can be seen as a reverse merge. Instead of two companies forming one entity, the parent splits and a division or a subsidiary will become an independent entity. An important character in this research is that both the parent and the spun-off should be stock market listed (Wachtell, Lipton, Rosen and Katz, 2016). Spin-offs occur because people believe that certain companies create higher value if owned and managed separately, think about cutting down agency costs (Lau and Yu, 2018). The shareholders of the parent get shares of the spun-off as a form of dividend (Vijh, 1994). There is no cash involved in the process. Spinning off is a way of reformation, the parent entity will remain as a smaller entity. Motivations can be to have more industrial focus, geographical focus or to get rid of a toxic assets (Hayward and Shimizu, 2006). The spun-off entity will also get more specific attention, since it will be an organization on its own. According to Marquette and Williams (2007) this can increase shareholder value when the spun-off has growth opportunities that can be employed. Another advantage of a

(8)

spin-off is that it is non-taxable, so it is a low-cost way to transfer control (Best, Best and Agapos, 1998).

2.2 Theoretical background

An interesting theory to consider with spin-offs is the stewardship theory, a relatively new management theory. This theory argues that people are self-actualizing and good stewards in nature, thus they are motivated to work hard for their company and to look after its interests and those of its shareholders (Kashiwagi, 2005). It denies the existence of the problems identified by the agency theory, which occur with the separation of ownership and control (Keay, 2017). There is an alignment with the agent and the entity’s interests, not a conflict. Tight controls could crowd out intrinsic motivation (Schillemans and Busuioc, 2015). According to Davis, Schoorman and Donaldson (1997), a spin-off is a way to control self-serving managers if the agency theory fails. However, accountability is as relevant for the stewardship theory, as it is to the agency theory. For example, to guide for being efficient and making decisions, and to prevent informal relationships to become detrimental. With a spin-off, there is a reformation, so a moment to overthink and create new roles. The stewardship theory argues that the reallocation of corporate control from owners to professional managers may be a positive development toward managing the complexity of the modern corporation (Muth and Donaldson, 1998). Because companies become more technology intensive, which leads to worse asymmetric information problems, a spin-off gives more benefits (Borah, Pan, Park and Shao, 2018). With spin-offs, the parent entity has a reorganization, and needs to have the best settlement, considering assets. The spun-off on the other hand, needs all hands on deck in order to become a successful entity. Therefore, it is crucial to have a management that has the capability but also gets the authority to be in charge. Managers will do the right thing (Caldwell and Karri, 2005). The stewardship theory states that as long as the fundamental

(9)

coalition between managers and owners remains intact, the organization is ongoing (Donaldson and Davis, 1991). It focuses on structures that facilitate and empower, instead of structures that monitor and control (Davis et al., 1997). This mindset is needed for spinning off, not to run aground in the old conduct of business, but to open up for new opportunities and feel involved.

3 Related literature & Hypothesis development

3.1 You don’t own me

The resilience of brands in today’s fragile and competitive environment has evolved in a greater focus on effective branding (Rambocas, Kirpalani and Simms, 2016). A brand can be identified by its name and symbol, often going hand in hand. Brand equity is the customers willingness to pay a higher price, recommend the brand and consider brand extensions (Aaker, 1991 referred to by Ailawadi, Lehmann and Neslin, 2003, Bendixen, Bukasa and Abratt, 2004). Biedenbach, Bengtsson and Marell (2015) found a direct positive effect of satisfaction on the consumer perceptions of brand equity (Cobb-Walgern, Ruble, Donthu, 1995). It is often assumed that brands represent an asset, a source of current and future earnings. Therefore, brand equity has a positive effect on the stock value (Pahud de Mortanges and Van Riel, 2003, Yoo and Donthu, 2001).

Barwise (1993) believes that there is too much focus on short term performance, at the expense of the long-term brand value. Shareholders and investors may not be considering a corporate parent’s brand equity in evaluating the investment value of a spun-off, although a parent brand’s equity is of great importance when evaluating a brand extension (Bhat and Burg, 2011).5

5 My work differs from Bhat and Burg (2011) in the way that they look at communicating a parent brand’s heritage in the form of the name, slogan or other reference. I look at brand equity in the way of the brand name. They look whether spun-offs that communicate the parent brand heritage outperform the S&P500, not if it has good influence compared with the parent. Also, they do not investigate if not using brand equity was the better option given the circumstances. They did not find a significant result, and used spin-off data between 1992 and 2004. I will use data between 2000 and 2020.

(10)

An advantage of keeping the parent’s brand name is sharing marketing costs. According to Simon and Sullivan (1993), an advertising campaign increases the expected future returns to the entity’s stock. Because traders will buy more stock, the price will increase until it fully reflects the expected future return. This includes the increased value of brand equity. It is natural to communicate a parent’s brand name as part of a spun-off’s branding strategy to leverage the parent’s corporate brand equity (Bhat and Burg, 2011). The deployment of a brand name for a spun-off increases the success rate by 20 per cent and saves 26 per cent on launch marketing (Newman, 2001). The spun-off entity can also build brand awareness and brand associations way more easily when it uses the parent’s brand name. This results in attracting customers, shareholders, bankers and employees with less effort and thus greater chances to succeed, which can affect the stock price of the spun-off. It is likely that spun-offs that refer to their parent brand would command greater market valuation (Bhat and Burg, 2011). Strong brands reduce financial risk and give cognitive and emotional trust in decisions (Hoeffler and Keller, 2003).

On the other hand, there are studies that provide evidence that new brands have advantages over established brands. They have a greater impact on advertising, better brand extension opportunities and more accurate targeting (Hoeffler and Keller, 2003). Horsky and Swyngedouw (1987) even found that with bad performing companies a name change is associated with improved performance, which increases the market performance.

There are situations where from a strategic point of view spun-offs try not to be associated with the parent. A reason can be to avoid the business of its competitors (Bhat and Burg, 2011). Since using a well-known brand name can give a massive boost to the new spun-off entity and saves a lot of money to create brand awareness, I formulate the first hypothesis as follows:

H1: keeping the parent’s brand name has a positive effect on the market performance of the spun-off entity.

(11)

The abovementioned arguments arise from the spun-off entity point of view. But what should the parent consider? A corporate brand is seen as a guarantee of quality; an insurance against risk (Balmer and Gray, 2003). Can a parent warrant this when letting the spun-off use their name? According to Barwise (1993), brand extensions raise the long-term risk of negative image spillovers from any widely publicized problem linked to the same brand name. In other words, it makes the parent more vulnerable. The perceived fit is an important factor in brand extension. It could dilute the equity of the parent brand. Chaney, Devinney and Winer (1991) analyze the impact of brand extension on the market value of an entity. They found that a single extension received a minimal reaction, so not worth being at risk. Torres and Tribó (2011) found that customer satisfaction has a positive effect on overall brand equity, but when getting to broad it can lead to reductions in shareholder value causing a negative indirect effect on brand equity. The question remains, why are there still conglomerates?

Brand extensions are an opportunity for companies to use the brand name equity and enhance the marketing productivity. However, the question is, how extendible is the brand name? To be a successful conglomerate, a brand should enhance the value of brand associations (Rangaswamy, Burke and Oliva, 1993). A mistake in understanding the limits of the corporate brand can reduce the brand equity (Balmer and Gray, 2003). Lane and Jacobson (1995) state that brand attitude and brand name familiarity not only have positive benefits but can also detrimental consequences.

Concluding, there are a multiple risks and possible negative consequences. The only advantage can be to save on marketing costs. Since the parent entity is mostly the bigger party, these savings are not significant. Especially when considering the drawbacks, these can cost a lot of value and money. Therefore, I formulate the following hypothesis:

H2: giving the spun-off the parent’s brand name has a negative effect on the market performance of the parent.

(12)

3.2 To focus or not to focus

A combined organizational structure, like a conglomerate, is to take advantage of the synergy opportunities. But do these savings justify the negative costs of duplicative management structures? (Practical Law The Journal, June 2015). With a spin-off, the assets under a management are reduced. This leads to an increase in managerial efficiency (Desai and Jain, 1999). According to Çolak and Whited (2007), refocusing increases the value and investment efficiency of conglomerates. Meyer, Milgrom and Roberts (1992) conclude their paper with saying that if organizations were more focused, layoffs would be eliminated and this would save influence costs in multiunit organizations.

Managers want to focus more on their core business through restructuring, the advantages of economies of scope have come to an end (Comment and Jarrell, 1995, Mukherjee, Kiymaz and Baker, 2004). Companies may spin-off because of a change in the business environment or because of a change in strategy. Such a change of strategy could be to focus on a core business and spin-off a niche or unrelated business (Bhat and Burg, 2011). According to Chai et al. (2018) the motive to spin-off most supported in literature is focusing. With a focusing spin-off, the parent expects to gain a higher financial value as new, more focused entity (Bhat and Burg, 2011). Companies operating in a diverse range of industries benefit most from focusing spin-offs (Krishnaswami and Subramanian, 1999). A good argument is to reduce information asymmetry. Unrelated divisions are often sustained through cross-subsidies (Gilson, Healy, Noe and Palepu, 2001). This drains resources from the good performing divisions (Berger and Ofek, 1995). A spin-off can eliminate these cross-subsidies by separating unrelated divisions (Desai and Jain, 1999). In this way a good performing division is seen for their qualities. Campbell et al. (2019) found that only focusing spin-offs decrease the information asymmetry, the spun-off should be in a different industry to have better disclosure.

(13)

Shareholders however may find a diversified company a good investment to spread risks through different industries. A detrimental effect of a parent entity getting more focused, is that there will be a loss of the diversification potential (Chai et al., 2018). As a result, this could have negative effects on the market performance.

Desai and Jain (1999) found that the motivation for non-focusing spin-offs are to get rid of bad performing subsidiaries. Efficiency does not appear to be the main motive since there is no evidence that having a spin-off can be a solution. Nevertheless, a strategic example of a non-focusing spin-off is given by John (1993). A cigarette company wants to spin-off their subsidiary, a food company, in order to protect the subsidiary from legal claims against the parent. But looking at the stock market, Murray (2008) only found a significant positive market response at the announcement date when the spin-off is focusing. Based on this information, I formulate the following hypothesis:

H3: a focusing spin-off positively moderates the relation between the market performance and brand extension of the parent.

According to Barwise (1993), brand equity can be leveraged beyond its original market in two ways. Besides an increase of industrial focus, another cause is to increase the geographical focus. Advantages can be to reduce the complexity which results in lower monitoring and coordinating costs, a decrease of risks coming hand in hand. In other words, this enables a reduction of the agency problem. On the other side, it may create a disadvantage on competitors that operate globally (Veld and Veld-Merkoulova, 2004). Investors that want to have a diversified portfolio might pay a premium to globally diversified companies because it is more expensive to compose such a portfolio as an individual (Denis, Denis and Yost, 2002). But internationally trading becomes less and less expensive.

(14)

However, a more recent study from Chai et al. (2018) could not support the findings of others, that abnormal returns due to a spin-off are related with an increase of industrial or geographical focus. They even state that focusing spin-offs are not associated with higher abnormal returns than non-focusing spin-offs. Chai and al. (2018) think it is possible that the benefits of a focusing spin-off only boost the market around the spin-off date.

A spin-off is a way to increase focus, executed by selling assets. Performing a spin-off is not to generate immediate cash, but to improve efficiency. Desai and Jain (1999) look from the spun-off point of view and find that the initial public offering period as well as the long-run abnormal returns are higher with focusing spin-offs. Insignificantly they found that non-focusing spin-offs have a negative return one year after the initial public offering period. Daley, Mehrotra and Sivakumar (1997) find that focusing spin-offs have longer initial public offering period abnormal returns than the non-focusing spin-offs. Based on these findings, I formulate the following hypothesis:

H4: a focusing spin-off positively moderates the relation between the market performance and brand extension of the spun-off entity.

3.3 The bigger the better

When a big firm is spinning off a division, it is plausible that this division will be bigger than when a small firm is spinning off. According to Campbell et al. (2019) the average percentage of assets that are spun-off is 26.6 percent. So with a bigger firm, the amount of assets that is divested is larger (Veld and Veld-Merkoulova, 2009). This results in a larger firm performance effect for the parent. Campbell et al. (2019) investigate the reducing of information asymmetry due to a spin-off. They find that larger parent firms have more benefit since the impact on a better disclosure is bigger. Lee and Madhavan (2010) find that when firms have grown too large, a spin-off allows them to return to an efficient size. Big firms also have a

(15)

greater range of options on how and what they want to spin-off (Dawley, Hoffman and Lamont, 2002). Given these findings, I formulate the following hypothesis:

H5: firm size positively moderates the relation between the market performance and brand extension of the parent.

4 Research design

4.1 Sample

To construct the parent sample, I downloaded all observations for spin-off announcements between 2000 and 2020 from SDC Platinum database. I chose to look at the announcement date, not the effective date, since the announcement date provides shareholders with a lot of valuable information regarding financial statements. For the financial information I used Compustat North America, because the companies in my sample are US-based parents. The initial sample consists of 764 US parent companies with a spun-off on which there is available data in SDC Platinum. After merging the dataset with financial information, the sample is reduced to 142 spin-off firms with complete data, since I am looking for completed spin-offs with listed parents and spun-offs. To compare with others, Chai et al. (2017) had a sample of 87, Campbell et al. (2019) 131, Bhat and Burg (2011) 154, Semadeni and Cannella (2011) 142, Desai and Jain (1999) 155 and Cusatis et al. (1993) 146. Chai at al. (2017) researched the sample size of 16 previous US studies, between 1983 and 2011, where the mean is 97. All continuous variables are winsorized at 1% and 99% to eliminate the effect of outliers. Finally, I construct the brand extension indicator variable by manually coding the similarity between the spun-off and the parent brands in the post-spin-off period.

For the spun-offs I used a different sample of 111 observations with information of US spun-off and parent firms, completed after 2000. The size is based on the availability of parent

(16)

and spun-off names and financial information. I even searched for the correct firm names of 12 samples to be able to merge with the Compustat North America financial information. The name of the parent can have changed, or the spun-off is acquired. This makes it difficult to trace back the listed names and thus the brand names at the moment of my research, announcement date until one year later. What also happens, is that with the announcement the spun-off initially has a different name than when it becomes effective. For this sample I also coded the brand extension manually. The final sample with complete data is 52.

4.2 Empirical models Dependent variable

The dependent variable in this research is the firm market performance. This will be measured with three values regarding one year post-spin-off ratio. The first is the Tobin’s Q, the post-spin-off ratio, in line with Hawn and Ioannou (2016). The second is Return and the third Price. See Table 1 for their descriptions. I obtain this information via Compustat.

Independent variables of interest

The independent variables in this research are brand extension, focusing and size. How these are measured can be found in Table 1. Brand extension is defined as using a well-known brand name to leverage consumer recognition into successful new product and service offerings (Aaker and Keller, 1990, via Le, Cheng, Lee and Jain, 2012, Campbell and Kent, 2002). This is measured with a dummy variable, where 1 represents brand extension and 0 represents no brand extension.

Focusing is defined as a spin-off where the parent is in a different industry than the

(17)

1 states that the spun-off is active in a different industry and 0 states that the spun-off is active in same industry.

Firm size is in literature indicated as the natural logarithm of total assets (Hoque and

James, 2000, Lopez-Valeiras, Gomez-Conde and Fernandez-Rodriguez, 2016). In my thesis it is measured as the log of the total assets one year pre-spin-off.

Control variables

The control variables used for this research are: Firm Size, Return on Assets, Tangibility,

Current Ratio, Leverage and Loss. The measurement of these variables are given in Table 1.

For the spun-off sample Loss is not used as control variable given the very small number of observations.

Empirical model

Building on previous literature on stock market reactions, I construct the following model, to test the predictions of Hypothesis 1 and 2:

FirmMarketPerf = β0 + β1 Brand_extension + β2 Size + β3 ROA + β4 TANG + β5

Current_ratio + β6 LEV + β7 Loss + Industry Fixed effects + εt (1)

Where FirmMarketPerf takes the following three values, alternatively: Tobin’s Q, computed as the post-spin-off ratio of the sum of market capitalization and total assets minus the book value of shareholder’s equity, divided on total assets (in line with Hawn and Ioannou, 2016); Return, computed as the ratio of one-year post-spin-off close price minus spin-off announcement date close price divided by spin-off announcement date close price, and Price, defined as the natural logarithm of one-year post-spin-off close price.

(18)

The main independent variable of interest is Brand_extension, which is an indicator variable that I have hand-coded. Specifically, it takes the value of 1 if the brand of the spun-off is significantly similar with the one of the parent firm and 0 otherwise.

As control variables I use Firm Size (Size), as previous literature suggests that firm size is positively associated with market performance (e.g., Blackwell, Noland and Winters, 1998). Further, I include Return on Asset (ROA) in our models, because equity holders tend to bid higher prices for firms with high profitability (Kim, Simunic, Stein, Yi, 2011). Firms’ ability to meet their short-term obligations is positively associated with their market performance. Thus, I add Current Ratio (CR) in our models. As indicated by Jensen and Meckling (1976), agency costs increase with the level of debt. In order to control for the risk of distress and agency costs, I use Leverage (LEV) and Loss. Previous literature on loan contracting suggests that the firm market performance is expected to be positively associated with tangible assets (e.g. Kim, Tsui, Yi, 2011, and Florou and Kosi, 2015). Thus, I include Tangibility (TANG) in the model. For a detailed description of all the variables use in this thesis, please see Table 1.

Further, in Model 2 I add the interaction term between Brand_extension and Focusing, to measure the incremental effect of the type of spin-off on firm performance for firms with post-spin-off joint brands.

FirmMarketPerf = β0 + β1 Brand_extension + β2 Focusing + β3 Brand_extension * Focusing

+ β4 Size + β5 ROA + β6 TANG + β7 Current_ratio + β8 LEV + β9 Loss +

Industry Fixed effects + εt (2)

Lastly, in Model 3 I add the interaction term between Brand_extension and Size, to measure the incremental effect of size on firm performance for firms with post-spin-off joint brands.

(19)

FirmMarketPerf = β0 + β1 Brand_extension + β2 Size + β3 Brand_extension * Size + β4 ROA

+ β5 TANG + β6 Current_ratio + β7 LEV + β8 Loss + Industry Fixed effects

+ εt (3)

Models 1 to 2 are OLS with robust standard errors.

5 Results

5.1 Main results Descriptive Statistics

In Table 2 the descriptive statistics are shown. To start with, not all variables have the same observation amount. This is because not every company has information about all the variables. Furthermore, Table 2 show the mean, standard deviation, minimum and maximum of every variable. All continuous variables are winsorized. Winsorizing means that outliers are removed from the sample when they are part of the 1% lowest values or the 1% highest values. This because these outliers have a dominant role and due to them the picture given will not be representative.

Pearson’s Correlations

In Table 3 the Pearson’s Correlation is shown. The outcome can be between -1 and 1. Since all my correlation are between -0.7 and 0.7, there is a reduced risk of multicollinear, in other words, it is not plausible that two variables measure the same thing.

Regression Analysis

To test the predictions of Hypothesis 1, I estimate model 1 in Table 5. In order to see the impact of brand extension on the firm market performance of spun-offs a regression is made between brand extension and the three values that measure the firm market performance. Only

(20)

Return has a small significant regression of -0.778 (p<0.05). This suggests that brand extension

has a negative impact on the spun-off firm. The Hypothesis that brand extension has a positive effect on the firm market performance of a spun-off must be rejected.

For Hypothesis 2, model 1 is used as well, shown in Table 4. Here there are significant results for all three firm market performance measures. Tobin’s Q has a big negative regression of -6.860 with a significance of p<0.01. Return also has a negative relationship of -0.251 with a significance of p<0.1. Here brand extension has a much smaller negative effect. Price has a big negative effect as well, -4.739 with a significance of p<0.1. It can be concluded that brand extension has a negative effect on the firm market performance of a parent. The Hypothesis that brand extension has a negative relation to the firm market performance of a parent can be accepted.

For the predictions of Hypothesis 3, shown in Table 6, model 2 is estimated. Brand extension in combination with a focusing spin-off has a big positive effect on the Tobin’s Q, 13.276 with a significance of p<0.1. On Return it as a slightly negative effect of -0.219, since this effect is not significant, no conclusion can be made from this result. On Price, a focusing spin-off also has a big positive result of 9.292 with a significance of p<0.01. The Hypothesis that a focusing spin-off has a positive moderating effect on the firm market performance of a parent can be accepted, it counteracts the negative influence of brand extension.

The moderating effect of focusing on spun-offs is show in Table 7, using model 2.

Return is the only variable giving a significant coefficient of 1.420 (p<0.1). Focusing has a

smaller positive moderating effect on spun-offs. The positive coefficient suggest that Hypothesis 4 can be accepted.

To test the predictions of Hypothesis 5, model 3 is estimated. Table 8 shows that the regression of brand extension in combination with a parent’s firm size on the Tobin’s Q is positive, 3.903 with a significance of p<0.01. The relation with Return is slightly positive, 0.054

(21)

but not significance. Price also gives a positive relation with a high significance, 5.113, p<0.01. The Hypothesis that size has a positive moderating effect on the firm market performance in combination with brand extension of a parent can be accepted, it makes the impact of brand extension less negative.

5.2 Robustness tests

As robustness test I recoded the brand extension variable in a more conservative way, resulting in less 1 values; less brand extensions. The results are similar to the original coding.

6 Conclusions

The aim of this research is to see the impact of brand extension on the firm market performance of both parents and spun-offs, to gain more insight on why companies choose to communicate their brand name with a spin-off. For parent firms, this is tested by three Hypotheses, the first to measure the main independent variable, brand extension, the other two to see if focusing and size moderate the effect. I tested these Hypotheses with a sample of 142 US parent firms that announced and executed a spin-off between 2000 and 2020. As expected in Hypothesis 2, brand extension has a negative relation to firm market performance. All three firm market performance measures have a negative significant coefficient. Tobin’s Q has a regression of -6.860, Return -0.251 and Price -4.739. This means that for a parent there are no advantages in communicating their brand name. The moderating variables both have a positive coefficient suggesting that focusing and size positively moderates the effect of brand extension on the firm market performance. It counteracts the negative effect of communicating the brand name. As expected in Hypothesis 3, focusing has a big positive significant coefficient of 13.276 for Tobin’s Q and 9.292 for Price. Return however has a slightly negative effect of -0.219 which is not significant. With Hypothesis 5 Return is also not significant, however here it has a slightly

(22)

positive effect of 0.054. The significant coefficient of Tobin’s Q is 3.903 and Price is 5.113. Concluding, given the strong significant number, it is always better to execute a focusing spin-off or to execute a spin-spin-off when it regards a larger firm. All Hypotheses made regarding the parent can be accepted.

For spun-off firms I tested the Hypotheses with a sample of 52 US parent and spun-off firms between 2000 and 2020. I expected that communicating the parent’s brand name comes with multiple advantages, but this did not come forward in the regression. Hypothesis 1 had to be rejected, Return has a small significant negative regression of -0.778 (p<0.05). However, since there is a low number of observations and it is a small effect, only Return gives a significant result for measuring firm market performance, it is doubtful whether conclusions can be made based on this. Furthermore, for spun-offs it can also be concluded that it is better to have a focusing spin-off. Hypothesis 4 can be accepted, focusing positively moderates the effect that brand extension has on firm market performance. However, here Return is the only variable significant variable as well, 1.420.

In terms of theoretical contribution, this paper is the first that looks into the effect of brand extension on the market performance of both parents and spun-offs. Firm market performance is measured over one year after the announcement date, so that the effect of the information given at the announcement is taken into account, and the length can show the effect of this announcement on investors without having too much emphasis on other factors (Bhat and Burg, 2011). Using only one time frame gives an unequivocal insight compared with other papers (Chai et al., 2018, Veld and Veld-Merkoulova, 2009, Desai and Jain, 1999 and Cusatis, 1993). Furthermore, this research is unique for using very recent data, between 2000 and 2020. Looking at recent papers, Chai et al. (2018) use data from 1999 to 2013 and Bhat and Burg (2011) from 1992 to 2004. With convincing coefficients this research brings forward that in recent years for US parent firms it is not rewarded to communicate the brand name with

(23)

spinning of, and to always choose for a focusing spin-off, unless the firm is large. Another strong aspect of this research is that for firm market performance it does not just look at the stock market price, which can fluctuate a lot, and could therefore give a distorted picture. First it looks at three values, secondly the Tobin’s Q uses assets in their measurement, which is more substantial.

A major limitation in this research is the small sample size. Especially for the spun-off, very little significant results are found. In further research it would be interesting to look at a bigger sample size, in order to gain more significant results and to make stronger conclusions. The sample would be even better when there is one sample containing both the parents and the spun-offs, to be able to compare and give a more unbiased result. In this way the distribution of industries, years, brand extension, focusing and size would be the same for both. Another interesting adjustment in the sample could be to look at different countries.

Since the high positive moderating effect of focusing, it would be interesting to test if focusing removes the negative effects on the relationship of brand extension and firm market performance.

Lastly, in this research no distinction is made on how long from the announcement date the spin-off is effective. Since I look at a one year window, some spin-offs might be effective one month after the announcement, others after 11 months. To look at a more identical time frame on effective spin-offs might give interesting results.

(24)

References

Aaker, D. A. (1991) Managing brand equity: capitalizing on the value of a brand name. New York: Free Press.

Aaker, D. A. and Keller, K. L. (1990) “Consumer Evaluations of Brand Extensions,” Journal of Marketing, 54(1), pp. 27–41.

Abarbanell, J. S., Bushee, B. J. and Smith Raedy, J. (2003) “Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin‐offs*,” The Journal of Business, 76(2), pp. 233–261. doi: 10.1086/367749.

Ailawadi, K. L., Lehmann, D. R. and Neslin, S. A. (2003) “Revenue Premium As an Outcome Measure of Brand Equity,” Journal of Marketing, 67(4), pp. 1–17.

Balmer, J. M. T. and Gray, E. R. (2003) “Corporate Brands: What Are They? What of Them?,” European Journal of Marketing, 37(7/8), pp. 972–997.

Barwise, P. (1993) “Brand Equity: Snark or Boojum?,” International Journal of Research in Marketing, 10(1), pp. 93–104. doi: 10.1016/0167-8116(93)90036-X.

Bendixen, M., Bukasa, K. A. and Abratt, R. (2004) “Brand Equity in the Business-To-Business Market,” Industrial Marketing Management, 33(5), pp. 371–380. doi: 10.1016/j.indmarman.2003.10.001.

Berger, P. G. and Ofek, E. (1995) “Diversification's Effect on Firm Value,” Journal of Financial Economics, 37(1), pp. 39–65. doi: 10.1016/0304-405X(94)00798-6.

Best, R. W., Best, R. J. and Agapos, A. M. (1998) “Earnings Forecasts and the Information Contained in Spinoff Announcements,” Financial Review, 33(3), pp. 53–68. doi: 10.1111/j.1540-6288.1998.tb01382.x.

Bhat, S. and Burg, C. J. (2011) “Does Communicating Corporate Parent Brand Heritage Help Spin‐off Stock Performance?,” Corporate Communications: An International Journal, 16(1), pp. 27–37. doi: 10.1108/13563281111100953.

Biedenbach G, Bengtsson M and Marell A (2015) “Brand Equity, Satisfaction, and Switching Costs: An Examination of Effects in the Business-To-Business Setting,” Marketing Intelligence and Planning, 33(2), pp. 164–178. doi: 10.1108/mip-03-2014-0059.

Binnenlandsbestuur.nl, Signify. https://www.binnenlandsbestuur.nl/Signify

Blackwell, D. W., Noland, T. R. and Winters, D. B. (1998) “The Value of Auditor Assurance: Evidence from Loan Pricing,” Journal of Accounting Research, 36(1), pp. 57–70.

(25)

Borah, N., Pan, L., Park, J. C. and Shao, N. (2018) “Does Corporate Diversification Reduce Value in High Technology Firms?,” Review of Quantitative Finance and Accounting, 51(3), pp. 683–718. doi: 10.1007/s11156-017-0685-2.

Brown, K. C. and Bryce A. Brooke (1993) “Institutional Demand and Security Price Pressure: The Case of Corporate Spinoffs,” Financial Analysts Journal, 49(5), pp. 53–62.

Caldwell, C. and Karri, R. (2005) “Organizational Governance and Ethical Systems: A Covenantal Approach to Building Trust,” Journal of Business Ethics, 58(1-3), pp. 249– 259.

Campbell, J.L., Ettredge, M., Guo, F. and Wiebe, Z. 2019. Information Asymmetry in Spinoffs: The Role of Incremental Disclosure. Available at SSRN 3220724.

Campbell, R. M. and Kent, A. (2002) “Brand Extension Evaluation: The Case of Nfl Europe,” SPORT MARKETING QUARTERLY, 11, pp. 117–120.

Chai D., Veld C. and Lin Z. (2018) “Value-Creation through Spin-Offs: Australian Evidence,” Australian Journal of Management, 43(3), pp. 353–372. doi: 10.1177/0312896217729728.

Chaney, Devinney, P. K. and Winer, T. M. (1993) “The Impact of New Product Introductions on the Market Value of Firms,” Insurance Mathematics and Economics, 12(1), pp. 82– 83. doi: 10.1016/0167-6687(93)91065-3.

Cobb-Walgren, C. J., Ruble, C. A. and Donthu, N. (1995) “Brand Equity, Brand Preference, and Purchase Intent,” Journal of Advertising, 24(3), pp. 25–40.

Çolak, G. and Whited, T. M. (2007) “Spin-Offs, Divestitures, and Conglomerate Investment,” The Review of Financial Studies, 20(3), pp. 557–595.

Comment, R. and Jarrell, G. A. (1995) “Corporate Focus and Stock Returns,” Journal of Financial Economics, 37(1), pp. 67–87. doi: 10.1016/0304-405X(94)00777-X.

Cusatis, P. J., Miles, J. A. and Woolridge, J. R. (1993) “Restructuring through Spinoffs: The Stock Market Evidence,” JOURNAL OF FINANCIAL ECONOMICS -AMSTERDAM-, 33(3), pp. 293–293.

Daley, L., Mehrotra, V. and Sivakumar, R. (1997) “Corporate Focus and Value Creation Evidence from Spinoffs,” Journal of Financial Economics, 45(2), pp. 257–281. doi: 10.1016/S0304-405X(97)00018-4.

Davis, J. H., Schoorman, F. D. and Donaldson, L. (1997) “Toward a Stewardship Theory of Management,” The Academy of Management Review, 22(1), pp. 20–47.

(26)

Dawley, D. D., Hoffman, J. J. and Lamont, B. T. (2002) “Choice Situation, Refocusing, and Post-Bankruptcy Performance,” Journal of Management, 28(5), pp. 695–717. doi: 10.1016/S0149-2063(02)00162-9.

Denis, D. J., Denis, D. K. and Yost, K. (2002) “Global Diversification, Industrial Diversification, and Firm Value,” The Journal of Finance, 57(5), pp. 1951–1979.

Desai, H. and Jain, P. C. (1999) “Firm Performance and Focus: Long-Run Stock Market Performance Following Spinoffs,” Journal of Financial Economics, 54(1), pp. 75–101. doi: 10.1016/S0304-405X(99)00032-X.

Donaldson, L. and Davis, J. H. (1991) “Stewardship Theory or Agency Theory: Ceo Governance and Shareholder Returns,” Australian Journal of Management, 16(1), pp. 49–64. doi: 10.1177/031289629101600103.

FD (2019), Philips neemt afscheid van Signify op lager Damrak. September 20, 2019.

https://fd.nl/beurs/1317588/licht-lagere-opening-damrak-op-komst?_ga=2.77959636.1910341508.1572446077-564415592.1568188914

Ferreira, M. P., Reis, N. R., Paula, R. M. and Pinto, C. F. (2017) “Structural and Longitudinal Analysis of the Knowledge Base on Spin-Off Research,” Scientometrics : An

International Journal for all Quantitative Aspects of the Science of Science, Communication in Science and Science Policy, 112(1), pp. 289–313. doi:

10.1007/s11192-017-2391-1.

Florou, A. and Kosi, U. (2015) “Does Mandatory Ifrs Adoption Facilitate Debt Financing?,” Review of Accounting Studies, 20(4), pp. 1407–1456. doi: 10.1007/s11142-015-9325-z.

Grant, N. N. J. (2018), Corporate Bonds after a Spin-off: Consider the Covenants. CFA, February 1, 2018.

Gilson, S. C., Healy, P. M., Noe, C. F. and Palepu, K. G. (2001) “Analyst Specialization and Conglomerate Stock Breakups,” Journal of Accounting Research, 39(3), pp. 565–582. Hayward, M. L. A. and Shimizu, K. (2006) “De-Commitment to Losing Strategic Action:

Evidence from the Divestiture of Poorly Performing Acquisitions,” Strategic Management Journal, 27(6), pp. 541–557. doi: 10.1002/smj.526.

Hawn, O. and Ioannou, I. (2016) “Mind the Gap: The Interplay between External and Internal Actions in the Case of Corporate Social Responsibility,” Strategic Management Journal, 37(13), pp. 2569–2588. doi: 10.1002/smj.2464.

(27)

Hite, G. L. and Owers, J. E. (1983) “Security Price Reactions Around Corporate Spin-Off Announcements,” Journal of Financial Economics, 12(4), pp. 409–436. doi: 10.1016/0304-405X(83)90042-9.

Hoeffler, S. and Keller, K. (2003) “The Marketing Advantages of Strong Brands,” The Journal of Brand Management, 10(6), pp. 421–445.

Hoque, Z. and James, W. (2000) “Linking Balanced Scorecard Measures to Size and Market Factors: Impact on Organizational Performance,” Journal of Management Accounting Research, 12(1), pp. 1–17. doi: 10.2308/jmar.2000.12.1.1.

Horsky, D. and Swyngedouw, P. (1987) “Does It Pay to Change Your Company's Name? A Stock Market Perspective,” Marketing Science, 6(4), pp. 320–335. doi: 10.1287/mksc.6.4.320.

HP (2014), HP to Separate Into Two New Industry-Leading Public Companies, October 6, 2014. Available: https://www8.hp.com/us/en/hp-news/press-release.html?id=1809455 Jensen, M. C. and Meckling, W. H. (1976) “Theory of the Firm: Managerial Behavior, Agency

Costs and Ownership Structure,” Journal of Financial Economics, 3(4), pp. 305–360. doi: 10.1016/0304-405X(76)90026-X.

John, T. A. (1993) “Optimality of Spin-Offs and Allocation of Debt,” The Journal of Financial and Quantitative Analysis, 28(1), pp. 139–160.

Kashiwagi, H. (2005) “Stewardship Theory: A Management Theory Based on a Self-Actualizing Man,” Japanese Journal of Administrative Science, 18(3), pp. 235–244. doi: 10.5651/jaas.18.235.

Keay, A. (2017) “Stewardship Theory: Is Board Accountability Necessary?,” International journal of law and management, 59(6), pp. 1292–1314.

Kim, J., Simunic, D., Stein, M. and Yi, C. (2011) “Voluntary Audits and the Cost of Debt Capital for Privately Held Firms: Korean Evidence *,” Contemporary Accounting Research, 28(2).

Kim, J., Tsui, J., and Yi, C. (2011) “The Voluntary Adoption of International Financial Reporting Standards and Loan Contracting Around the World,” Review of Accounting Studies, 16(4), pp. 779–811. doi: 10.1007/s11142-011-9148-5.

Krishnaswami, S. and Subramaniam, V. (1999) “Information Asymmetry, Valuation, and the Corporate Spin-Off Decision,” Journal of Financial Economics, 53(1), pp. 73–112. doi: 10.1016/S0304-405X(99)00017-3.

(28)

Kong Chow, Y. and Hamilton, R. (1993), "Corporate Divestment: An Overview", Journal of Managerial Psychology, Vol. 8 No. 5, pp. 9-13. https://doi-org.proxy-ub.rug.nl/10.1108/02683949310040579

Lane, V. and Jacobson, R. (1995) “Stock Market Reactions to Brand Extension Announcements: The Effects of Brand Attitude and Familiarity,” Journal of Marketing, 59(1), pp. 63–77.

Law, J. and Yu, W. (2018) “Corporate Spinoffs and Executive Compensation,” Frontiers of Business Research in China, 12(1), pp. 1–25. doi: 10.1186/s11782-018-0043-9.

Le, A., Cheng, J., Lee, Y. and Jain, M. (2012) “Brand Extension: Using Parent Brand Personality As Leverage,” Asia Pacific Journal of Marketing and Logistics, 24(4), pp. 599–618. doi: 10.1108/13555851211259043.

Lee, D. and Madhavan, R. (2010) “Divestiture and Firm Performance: A

Meta-Analysis,” Journal of Management, 36(6), pp. 1345–1371. doi:

10.1177/0149206309360931.

Lopez-Valeiras, E., Gomez-Conde, J. and Fernandez-Rodriguez, T. (2016) “Firm Size and Financial Performance: Intermediate Effects of Indebtedness,” Agribusiness, 32(4), pp. 454–465. doi: 10.1002/agr.21458.

Marel van der, G., (2019). [online] Available at: https://fd.nl/ondernemen/1300331/siemens-stapt-redelijk-gezond-in-nieuwe-fase-drastische-ombouw [Accessed 29 May 2019]. Marquette, C. J. and Williams, T. G. E. (2007) “Takeover-Divestiture Combinations and

Shareholder Wealth,” Applied Financial Economics, 17(7), pp. 577–586. doi: 10.1080/09603100600722169.

Meyer, M., Milgrom, P. and Roberts, J. (1992) “Organizational Prospects, Influence Costs, and Ownership Changes,” Journal of Economics Management Strategy, 1(1), pp. 9–35. doi: 10.1111/j.1430-9134.1992.00009.x.

Mukherjee, T. K., Kiymaz, H. and Baker, H. K. (2004) “Merger Motives and Target Valuation: A Survey of Evidence from Cfos,” JOURNAL OF APPLIED FINANCE, 14(2), pp. 7– 24.

Murray, L. (2008) “Spin-Offs in an Environment of Bank Debt,” Journal of Business Finance & Accounting, 35(3-4), pp. 406–433. doi: 10.1111/j.1468-5957.2008.02088.x.

Muth, M. and Donaldson, L. (1998) “Stewardship Theory and Board Structure: A Contingency Approach,” Corporate Governance: An International Review, 6(1), pp. 5–28. doi: 10.1111/1467-8683.00076.

(29)

Newman, K. (2001) “The Sorcerer's Apprentice? Alchemy, Seduction and Confusion in Modern Marketing,” International Journal of Advertising, 20(4), pp. 409–429. doi: 10.1080/02650487.2001.11104904.

Pahud de Mortanges, C. and van Riel, A. (2003) “Brand Equity and Shareholder Value,” European Management Journal, 21(4), pp. 521–527. doi: 10.1016/S0263-2373(03)00076-8.

Power Engineering International (2019), ‘Siemens unveils name of spin-off power company’. October 17, 2019. https://www.powerengineeringint.com/2019/10/17/siemens-unveils-name-of-spin-off-power-company/

Rambocas M, Kirpalani V.M and Simms E (2018) “Brand Equity and Customer Behavioral Intentions: A Mediated Moderated Model,” International Journal of Bank Marketing, 36(1), pp. 19–40. doi: 10.1108/IJBM-09-2016-0139.

Rangaswamy, A., Burke, R. R. and Oliva, T. A. (1993) “Brand Equity and the Extendibility of Brand Names,” International Journal of Research in Marketing, 10(1), pp. 61–75. doi: 10.1016/0167-8116(93)90034-V.

Semadeni, M. and Cannella, A. (2011) “Examining the Performance Effects of Post Spin-Off Links to Parent Firms: Should the Apron Strings Be Cut?,” Strategic Management Journal, 32(10), pp. 1083–1098.

Schillemans, T. and Busuioc, M. (2015) “Predicting Public Sector Accountability : From Agency Drift to Forum Drift,” Journal of Public Administration Research and Theory, 25(1).

Signify (2018), Philips Lighting is now Signify. May 16, 2018.

https://www.signify.com/global/our-company/news/press-releases/2018/20180516-philips-lighting-is-now-signify

Simon, C. J. and Sullivan, M. W. (1993) “The Measurement and Determinants of Brand Equity: A Financial Approach,” Marketing Science, 12(1), pp. 28–52. doi: 10.1287/mksc.12.1.28. Torres, A. and Tribó, J. A. (2011) “Customer Satisfaction and Brand Equity,” Journal of

Business Research, 64(10), pp. 1089–1096. doi: 10.1016/j.jbusres.2010.12.001.

Veld, C. and Veld-Merkoulova, Y. V. (2004) “Do Spin-Offs Really Create Value? The European Case,” JOURNAL OF BANKING AND FINANCE, Vol 28(Vol 28), pp. 1111– 1136.

Veld, C. and Veld-Merkoulova, Y. V. (2009) “Value Creation through Spin-Offs: A Review of the Empirical Evidence,” International Journal of Management Reviews, 11(4), pp. 407– 420.

(30)

Vijh, A.M., 1994. The spinoff and merger ex‐date effects. The Journal of Finance, 49(2), pp.581-609.

Wachtell, Lipton, Rosen and Katz (2016). “Spin-Off Guide”

Yoo, B. and Donthu, N. (2001) “Developing and Validating a Multidimensional Consumer-Based Brand Equity Scale,” Journal of Business Research, 52(1), pp. 1–14. doi: 10.1016/S0148-2963(99)00098-3.

(31)

Table 1

Variable Definition

Brand_extension

An indicator variable (hand-coded), that takes the value of 1 if the brand of the spun-off is significantly similar with the one of the parent firm; 0 otherwise.

Tobin’s Q The post-spin-off ratio of the sum of market capitalization and total assets minus the book value of shareholder’s equity, divided on total assets.

Return

Ratio of one-year post-spin-off close price minus spin-off announcement date close price divided by spin-off announcement date close price.

Price _{The natural logarithm of one-year post-spin-off close price.}

Focusing _{Indicator variable, that takes the value of 1 if the spun-off and the}

parent company pertain to a different 2 SIC industry; 0 otherwise. Firm Size (Size) _{The log of total assets in year t-1.}

Firm-Specific Controls

Return on Asset (ROA) Net income divided by total assets in year t-1.

Tangibility (TANG) Net property, plant, and equipment divided by total assets in year

t-1.

Current Ratio (CR) Current assets divided by current liabilities in year t-1. Leverage (LEV) Total liabilities divided by total assets in year t-1.

Loss An indicator variable that equals 1 if net income is negative in year

(32)

Table 2

Descriptive Statistics

Parent firms

N Mean Std. Deviation Minimum Maximum

Tobin's Q 132 -.0393464 9.276.653 -6.773.214 1.857.399 Return 155 .0731882 .8979855 -.9208333 5.666.667 Price 171 2.018.501 2.343.302 .0005 131.1 Brand_extension 764 .5117801 .5001887 0 1 Focusing 25,649 .4541698 .4979049 0 1 Size 159 5.344.351 2.951.581 -3.912.023 1.206.469 ROA 758 -.3215657 2.753.424 -2.805.797 .5604427 CR 654 2.842.491 5.768.304 .0124566 5.125.962 Tang 730 .2872604 .2589063 0 .9341573 LEV 758 .8702831 2.032.434 .0179908 1.994.795 Loss 764 .2827225 .4506177 0 1

Where Brand_extension is an indicator variable (hand-coded), that takes the value of 1 if the brand of the spun-off is significantly similar with the one of the parent firm; 0 otherwise. Tobin’s Q is the post-spin-spun-off ratio of the sum of market capitalization and total assets minus the book value of shareholder’s equity, divided on total assets.

Return is the ratio of one-year post-spin-off close price minus spin-off announcement date close price divided by

spin-off announcement date close price. Price is the natural logarithm of one-year post-spin-off close price.

Focusing is an indicator variable, that takes the value of 1 if the spun-off and the parent company pertain to a

different 2 SIC industry; 0 otherwise. Size is the natural logarithm of total assets in year t-1. ROA is net income divided by total assets in year t-1. TANG represents net property, plant, and equipment divided by total assets in year t-1. CR is current assets divided by current liabilities in year t-1. LEV is total liabilities divided by total assets in year t-1. Loss is an indicator variable that equals 1 if net income is negative in year t-1; 0 otherwise.

Spun-off firms

N Mean Std. Deviation Minimum Maximum

Tobin's Q 62 1.217.678 5.287.357 -.9388536 3.121.213 Return 63 .1961906 1.112.101 -.8727273 7.823.529 Price 68 3.357.394 4.248.299 .03 253 Brand_extension 74 .2972973 .4601885 0 1 Focusing 111 .5225225 .5017578 0 1 Size 72 6.856.389 303.095 -1.114.742 1.322.812 ROA 72 .045452 2.185.869 -1.258.537 103.997 CR 57 2.171.994 2.056.262 .0741339 1.092.249 Tang 72 .3323327 .2793274 0 .9998003 LEV 72 .7538278 1.510.418 0 1.320.122

different 2 SIC industry; 0 otherwise. Size is the natural logarithm of total assets in year t-1. ROA is net income divided by total assets in year t-1. TANG represents net property, plant, and equipment divided by total assets in year t-1. CR is current assets divided by current liabilities in year t-1. LEV is total liabilities divided by total assets in year t-1.

(33)

Table 3

Pearson’s Correlations

Parent firms

Variables 1 2 3 4 5 6 7 8 9 10 11 Tobin's Q 1.0000 Return 0.0354 _1.0000 Price 0.1253 _{-0.0250 1.0000} Brand_extension -0.1073 -0.0471 0.1278 1.0000 Focusing _{-0.0867 -0.0484 0.1712 0.0560 1.0000} Size 0.1670 _{0.0193 0.5296 -0.0614 0.0151 1.0000} ROA 0.0089 _{-0.0868 0.0560 -0.0190 -0.0754 -0.0471 1.0000} CR 0.0401 _{-0.0783 -0.0444 -0.0064 -0.1241 0.1700 0.0503 1.0000} Tang _{-0.0338 -0.0048 -0.0967 0.0435 -0.1657 0.0135 0.0610 0.0024 1.0000} LEV 0.0084 0.0722 0.0832 0.0563 0.1053 0.0147 -0.8322 -0.1207 -0.1233 1.0000 Loss -0.0399 -0.1284 0.2482 0.1131 -0.0269 -0.0815 -0.2259 0.2287 -0.0074 0.2131 1.0000

Where Brand_extension is an indicator variable (hand-coded), that takes the value of 1 if the brand of the spun-off is significantly similar with the one of the parent firm; 0 otherwise. Tobin’s Q is the post-spin-off ratio of the sum of market capitalization and total assets minus the book value of shareholder’s equity, divided on total assets. Return is the ratio of one-year post-spin-off close price minus spin-off announcement date close price divided by spin-off announcement date close price. Price is the natural logarithm of one-year post-spin-off close price. Focusing is an indicator variable, that takes the value of 1 if the spun-post-spin-off and the parent company pertain to a different 2 SIC industry; 0 otherwise. Size is the natural logarithm of total assets in year t-1. ROA is net income divided by total assets in year t-1.

TANG represents net property, plant, and equipment divided by total assets in year t-1. CR is current assets divided by current liabilities

in year t-1. LEV is total liabilities divided by total assets in year t-1. Loss is an indicator variable that equals 1 if net income is negative in year t-1; 0 otherwise.

Spun-off firms

Variables 1 2 3 4 5 6 7 8 9 10 Tobin's Q 10.000 Return -0.0021 10.000 Price -0.1349 -0.0396 10.000 Brand_extension 0.0740 -0.0803 0.0980 10.000 Focusing 0.0302 0.1620 0.0341 -0.1844 10.000 Size -0.4947 -0.1358 0.2242 -0.0481 -0.0175 10.000 ROA -0.6227 0.0598 -0.0000 -0.0333 0.0379 0.0777 10.000 CR -0.1318 -0.0989 -0.1242 -0.0462 0.0624 -0.1420 0.1260 10.000 Tang -0.1171 -0.2089 0.2070 -0.0964 0.1395 0.1159 -0.0067 -0.2998 10.000 LEV 0.6739 0.0065 -0.1099 0.1659 -0.0967 -0.2657 -0.6897 -0.2290 -0.1336 10.000

Where Brand_extension is an indicator variable (hand-coded), that takes the value of 1 if the brand of the spun-off is significantly similar with the one of the parent firm; 0 otherwise. Tobin’s Q is the post-spin-off ratio of the sum of market capitalization and total assets minus the book value of shareholder’s equity, divided on total assets. Return is the ratio of one-year post-spin-off close price minus spin-off announcement date close price divided by spin-off announcement date close price. Price is the natural logarithm of one-year post-spin-off close price. Focusing is an indicator variable, that takes the value of 1 if the spun-post-spin-off and the parent company pertain to a different 2 SIC industry; 0 otherwise. Size is the natural logarithm of total assets in year t-1. ROA is net income divided by total assets in year t-1.

TANG represents net property, plant, and equipment divided by total assets in year t-1. CR is current assets divided by current liabilities

(34)

Table 4

The effect of brand extension on the post-spin-off firm market

performance of the parent

Tobin's Q Return Price

Brand_extension -6.860*** -0.251* -4.739* (2.096) (0.148) (2.679) Size 2.346*** 0.014 3.465*** (0.358) (0.025) (0.458) ROA 0.049 -0.043 0.289 (0.523) (0.037) (0.669) CR -0.358 -0.050 -2.014** (0.623) (0.044) (0.796) Tang 6.226 -0.292 -1.723 (4.585) (0.324) (5.862) LEV -0.183 0.023 0.446 (0.749) (0.053) (0.957) Loss -1.011 -0.369* -3.953 (2.883) (0.205) (3.686)

Industry dummy Yes Yes Yes

Constant -10.362 0.559 7.603

(6.704) (0.470) (8.571)

Observations 142 139 142

R-squared 0.335 0.119 0.460

Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

different 2 SIC industry; 0 otherwise. Size is the natural logarithm of total assets in year t-1. ROA is net income divided by total assets in year t-1. TANG represents net property, plant, and equipment divided by total assets in year t-1. CR is current assets divided by current liabilities in year t-1. LEV is total liabilities divided by total assets in year t-1. Loss is an indicator variable that equals 1 if net income is negative in year t-1; 0 otherwise.

Do you know who I am? The market performance impact of keeping the parent brand name after a spin-off