The devil is in the details? Determinants of successful corporate spin offs

The devil is in the details? Determinants of successful corporate spin

offs

Master Thesis, MSc Accountancy

University of Groningen, Faculty of Economics and Business

Klaas Krijgsheld S2754878 De Feart 83, Ureterp

06 11813421 k.krijgsheld@student.rug.nl

Thesis supervisor: V.A. Porumb Field of study: Accountancy

1

The devil is in the details? Determinants of successful corporate spin

offs

Abstract.

Conglomerate companies detach (spin off) a part of their structure out of different considerations. While the anticipation of the market is mostly positive for the parent company, contrasting evidence of extant literature suggest that it is however uncertain what is the exact nature of a spin off. These findings mostly stem from the fact that the management has extensive discretion – not truncated by the intervention of shareholders - over the decision to spin-off and over the conditions under which the divestiture would take place. Opportunistic behavior, such as empire building, risk reduction, overconfidence, increased value of manager’s human capital, and inertia might therefore cause managers to pass up on spin-offs that are value enhancing from shareholders’ perspective. I therefore hypothesize that the pre-spin-off level of corporate governance is positively related to post-spin-off performance. My results provide evidence that support this hypothesis. Secondly, I investigate the relation between pre-spin-off opacity and post-spin-off performance. I expect this effect to be stronger for focusing relative to non-focusing spin-offs. Test results indicate that there exists a positive relation between pre-spin-off opacity and post-spin-off performance. I however do not find support for this effect to be stronger for focusing spin-offs.

Keywords: Spinoffs; Corporate governance; Information asymmetry; Post-spin-off Performance; Focusing Spinoff

2

Table of Contents

6. Discussion and conclusion ... 17

7. Acknowledgements ... 19

References ... 19

3 1. Introduction

A spin off takes place when a company divides or a part of its structure into a newly formed publicly traded company (Campbell, Ettredge, Guo & Wiebe, 2018 and Habib; Johnsen & Naik, 1997). The main motivations for companies to perform a spin off lie mostly in refocusing, removing negative synergies, and raising cash (Bergh, et al., 2008). For example, several conglomerates, like Philips, General Electric and Siemens recently chose to sell a part of their empire. The Philips spin-off of its lighting division is aimed to become market leader in two separate markets. Concurrently, Siemens and General Electric split off less profitable divisions to avoid covering the losses. It is therefore uncertain what is the exact outcome of a spin off, although the anticipation is mostly positive for the parent company (Best, Best & Agapos, 1998).

Some companies are forced to restructure their business due to bad performance or bad economic conditions. Concurrently, other firms choose to voluntarily restructure as a response to declining performance (John, Lang & Netter, 1992). With disregard to the motivation, a significant number of academic studies assess the effect of the spin off announcement on the stock market price of the listed company (see Woo, Willard and Daellenbach 1992 and Fryges and Wright 2014 for a review of the literature). Starting with Rosenfeld (1984), spin offs announcements have been found to have a positive influence on stock market prices. More recently, Chemmanur & Liu (2011) document that undervalued firms can improve their stock price through a spin off. Furthermore, the positive influence is not only limited to the US. S & P Global (2017) found evidence that spin offs can create value for both US and international markets. However, literature is not conclusive about the exact nature of spin off success.

An important characteristic of spin offs is that CEOs have extensive discretion over the timing and conditions of the divestiture. In line with agency theory, managers have several reasons

4 to either (1) not spin-off divisions or subsidiaries or (2) perform value decreasing spin-offs (Ahn & Walker, 2007). These self-serving interests include empire building, risk reduction, overconfidence, increased value of manager’s human capital and inertia. These reasons cause managers to pass up on a spin-off, although it could bring benefits to shareholders. Stakeholder theory suggests that the managers’ interest should be aligned with the interest of the shareholders. Therefore, they should decide to spin-off when this could be beneficial to the shareholders. Nonetheless, Ahn, et al. (2007), found evidence that the effectiveness of corporate governance influences the spin off decision. Summed up, this suggests the importance of corporate governance in the process of reversing diversification.

Most of the currently available literature focuses on the relation between the announcements and firm stock market value. However, the literature did not currently explore the effect of corporate governance on the post-spin-off performance. This is a surprising omission, since the governance of the parent is likely to have a significant impact on the decision and conditions under which the spin-off is likely to take place. I therefore address this important gap in the literature by looking at the effect of corporate governance on the post-spin-off performance.

To test my expectations, I use spin-off information for a sample of 2,217 US firms. I obtain spin-off information from SDC Platinum database and financial information from Compustat North America. Moreover, I get corporate governance data from Boardex. After merging the available information from the three aforementioned databases, I obtain complete information for 189 firms. The results of my empirical tests suggest that several corporate governance measures are positively related to firm performance in the post-spin-off period. Consistent with prior research, I define firm performance as stock market valuation. Because I test several corporate governance determinants, my results have several implications for practice. First, shareholders of

5 large diversified firms should consider the size and diversity of the board of directors. For size they should establish a sound balance between the number of directors and efficiency. Additionally, the shareholders should contemplate the composition of the board. Within this coomposition, they should at least take in to account the number of outside directors, gender and nationality distribution. Another consideration for conglomerates would be to appoint an outside CEO. For further research I suggest researching additional determinants of corporate governance. This could lead to further implications.

My paper brings several contributions. First, to my knowledge this is the only empirical study that analyzes the impact of different determinants of corporate governance on firm performance post-spin-off. Second, I contribute to the literature by identifying contingencies under which the outcome of a spin-off could be value-enhancing or value-destroying for a company.

Overall, the results of my thesis have implications for financial analysts, credit market rating agencies and company executives.

This thesis is structured as follows: in section 2 I will set out the currently available theory on spin-offs. In section 3 I will discuss the hypotheses. In section 4 the data and research design will be discussed. In section 5 I will discuss the results. And finally, in section 6 I will interpret the results and draw my conclusion.

2. Theory

Prior research argues that spin offs provide several benefits for increasing shareholder value. First, Campbell, et al. (2018) found a reduction of information asymmetry after the spin-off. By reducing the information asymmetry the market value of the firm is enhanced. This suggests that large conglomerates are less opaque, which reduces investor confidence. Furthermore, prior

6 research provides extant evidence on the efficiency enhancing effect of spin offs (e.g. Chemmanur, et al, 2010; Desai & Jain, 1999; Ahn, et al., 2004). This also supports the idea that large diversified firms must cope with efficiency issues. The diversification causes firms to be undervalued.1 This indicates an increase in stock market performance in the period after the spin-off (Feldman, 2016).

Even though, literature is positive about the effects of a spin-off, it also suggests that this is determined by the decision to spin-off (Çolak & Whited, 2007). Inefficient internal capital markets,2 declining performance and (re)focusing are some of the drivers for the spin off decision. One of the characteristics of the spin off decision is the involvement of the CEO. As mentioned in the introduction, opportunistic behavior of the CEO could destroy value from the perspective of the shareholders. This issue stems from different techniques employed by CEOs to keep their power. Prior research found that high levels of CEO decision-making power destroys shareholder value (Liu & Jiraporn, 2010). This further indicates the importance of corporate governance in the matter. Other issues that should be considered in the spin off decision are the local regulation and taxes (Veld & Veld-Merkoulova, 2004). These are all factors that could impact the performance of the spin off. However, my sample only includes US-firms. This means that I do not take these factors into account.

3. Hypotheses development

In line with stewardship theory, the CEO should behave in the best interest of the shareholders - the interests of the CEO and shareholders should be aligned. This can be achieved by using different incentive structures. In the process of spin offs the decision making lies mostly with the CEO. The first decision in this process is deciding whether to spin-off or not to engage in

1_{Veld, C., & Veld-Merkoulova, Y. V. (2004). Do spin-offs really create value? The European case.}

7 such a process. Literature suggests that this decision is impacted by the structure of corporate governance (Feng, Nandy & Tian, 2015; Ahn, et al., 2007; Bergh & Sharp, 2015). Furthermore, earlier research found that single decisions could impact both the performance of the spin off as that of the spun-off company (Chemmanur & Yang, 2004; Chemmanur, Jordan Liu & Wu, 201; Feldman, 2016; D’Mello et al., 2008). Additionally, prior research also suggests that effective corporate governance has a positive effect on the investment efficiency (Chen & Chen, 2012) and therefore affects the post spin off performance. This however was not tested in the context of spinoffs. In summary, current literature largely suggests that a higher level of corporate governance will lead to better post-spin-off performance for both the parent and the spun-off subsidiary.

In contrast to the positive effect of a high level of corporate governance, high CEO discretion has a positive effect on firm performance in stable environments (Haleblian & Finkelstein, 1993). In addition, powerful CEOs are able to react quicker to changing environments, may it be at the cost of the quality of the decision (Han, Nanda & Siveri, 2016). This could imply that a dominant CEO is able to turn the tides before it goes fully downhill, and therefore increase firm performance, in reference to a slower reaction. Further, research also states that entrenched CEOs behave differently to achieve high performance (Zhao, 2013). In this decision-making process they are less likely to make risky decisions (Zhao, 2013; Elyasiani & Zhang, 2015). However, the literature is overwhelming on the positive effect of corporate governance. Therefore, I formulate the following Hypothesis:

H1: The quality of parent company’s corporate governance in the pre-spin-off period is positively associated with the post-spin-off performance of the parent.

As agency theory suggests, information asymmetry exists between CEOs and shareholders. One of the considerations to divest a part of the business is reducing the information asymmetry

8 (Campbell, et al., 2018). Literature also found that a positive effect exists between information asymmetry pre-spin-off and disclosure innovation post-spin-off.3 In addition, Bergh et al. (2008) found that the relatedness of the spun-off division to the parent company is a determinant for post-spin-off performance. This means that when the spun-off entity is linked closely to the parent, the post-spin-off performance is positively influenced. The close link causes an increased amount of information sharing, therefore the transparency towards the parent management is high.

However, Huson and MacKinnon (2003) found opposing views when researching the changes in the company’s information environments. On the one hand, they found an increase in informativeness for investors as a result of increased informativeness of prices. On the other hand, they found increased usefulness of information possessed by informed investors. Overall, given the evidence in the literature, I expect that the spin-off will decrease information asymmetry more for companies with low pre-spin off transparency. I therefore formulate the following Hypothesis:

H2: The pre-spin-off opacity of the parent company has a positive effect on the post-spin-off performance.

Based on Bergh et al. (2008), the result of a spin off depends on the reason the division is spun-off from the company. This means the management has to be rational when deciding to restructure the company. In addition, Ahn & Denis (2004) found that conglomerates have to cope with the diversification discount. They conclude that diversification destroys value as a result of ineffective investments and can be remediated by a spin-off. Buch & Nanda (2003) hypothesized that conglomerates also have advantages due to efficient allocation of resources and reducing

3 _{Campbell, J.L., Ettredge, M., Guo, F. & Wiebe, Z. (2018). Information Asymmetry in Spinoffs: The Role of}

9 financing cost. Diversified firms are however also more likely to overinvest in divisions with poor prospects. Depending on the type of spin-off it is expected that divesting with the aim to focus is likely to perform better post-spin-off. Therefore, the following Hypothesis will be tested:

H3: A focusing spinoff has an incrementally positive effect on the post-spin-off performance of the parent company with larger levels of opacity.

4. Research design

4.1 Data

The sample I used is compiled out of different datasets from several sources. The sample construction, as shown in Table 1, shows the construction of the final sample. The starting sample from Compustat consists of data from listed firms from the United States between 1999 and 2018. This included 238,459 firm-year observations. The context of the listed firms allows me to track the performance of the company by analyzing the market value. The data from SDC Platinum contains data on 2,217 companies linked to spin-off announcements in the period between 1981 and 2019. The mismatch in period and the focus on companies with spin-off announcements explains the big loss of data. The opacity data was derived from the CRSP database. Finally, the corporate governance information was extracted from the Boardex database and subsequently added to the sample. After adding all information to the sample and eliminating duplicates and irrelevant data, I was left with 189 observations to test my first Hypothesis. For my second and third Hypothesis the set of complete data was smaller. The results from testing these hypotheses were derived form a complete sample of 43 observations.

10 Table 1: Sample construction

Full sample: financial data from US companies 1999-2018 1 Initial sample financial data from US companies 1999-2018 (Compustat,

November 2019) 238,459

2 Less: companies not linked to spin-off announcements (SDC platinum

November 2019) -222,361

3 Firm-year observations linked to SDC platinum 16,098

4 Less: non-relevant information (observations without information around the

year of the spinoff) -15,909

5 Spinoffs with available information on corporate governance

characteristics and financials 189

a) Table 1 shows the construction of the final sample to test the hypothesis

4.2 Dependent variable

To measure the dependent variable firm performance post spin-off, I calculate Tobin’s q. This is calculated following the method of Hawn and Iannou (2016). Specifically, it is calculated as the ratio of the sum of total market capitalization and total assets minus the total book value of the shares outstanding over total assets. For an overview of all variables used in testing I refer to Table A1 in the appendix. This Table contains the definition of each variable.

4.3 Independent variables

In the following paragraphs I will describe the independent variables and how they were computed. To measure corporate governance I considered the number of directors provided in the Boardex database as an indicator of corporate governance.4 _{Furthermore, board diversity is linked} to increasing firm value.5 This suggests that diversity in the board of directors increases the value for shareholders, and therefore corporate governance. With this in mind I computed the variable

4 _{1. De Andres, P., Azofra, V., & Lopez, F. (2005). Corporate boards in OECD countries: Size, composition,}

functioning and effectiveness. 2. De Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors.

11 board diversity. The variable board diversity is computed using principal component analysis in STATA. The components used in this variable were the total number of outsiders on the board, gender ratio and nationality mix. These are all variables commonly used for indicating board diversity. Consistent with current literature I used dummy variables which indicates whether the CEO is an outsider (Zhang & Rajagopalan, 2010) and whether the CEO and chairman of the board are one and the same person (Bhagat & Bolton, 2008).

To measure opacity I used the bid-ask spread6. This was calculated by taking the average of the bid price over a year adding this to the yearly average of the ask price, the outcome of this subtraction was divided by two. The final variable shown in the Table below is the focusing spinoff. This variable shows one when the spun-off company was from a different industry, based on the first two digits of the Standard Industrial Classification (SIC). For control variables I added year and industry fixed effects. Further I included variables that could influence the Tobin’s q and should therefore be controlled. These included leverage ratio, negative income and negative equity.

4.4 Methodology

The method used to perform the empirical analysis is ordinary least squares (OLS) regression. All non-bivariate variables were winsorized and standardized. Below every Table is shown whether the standard errors were robust. In every model I added fixed effects per year and industry.

6 _{1. Anderson, R. C., Duru, A., & Reeb, D. M. (2009). Founders, heirs, and corporate opacity in the United States.}

2. Campbell, J.L., Ettredge, M., Guo, F. & Wiebe, Z. (2018). Information Asymmetry in Spinoffs: The Role of Incremental Disclosure.

12 5. Results

5.1 Summary statistics

Table 2 shows the correlation matrix and descriptive statistics of the variables used in the models. It shows that Tobin’s q has a mean of 1.5 and board size one of 10. This means that my sample likely contains relatively large firms. As shown in the collinearity matrix there should be no issue regarding multicollinearity.

Table 2: Correlation matrix & descriptive statistics

1 2 3 4 5 6 7 8 9 10 1 Tobin's q 1.000 2 Board size -0.238 1.000 3 Board diversity -0.024 -0.219 1.000 4 CEO = outsider 0.405 -0.009 -0.022 1.000 5 CEO = chairman -0.178 0.032 -0.261 -0.053 1.000

6 Bid ask spread 0.245 -0.240 -0.048 0.037 0.003 1.000

7 Focusing 0.266 -0.326 -0.103 0.143 -0.083 0.301 1.000 8 Leverage ratio -0.114 0.438 -0.168 0.100 0.018 0.213 -0.192 1.000 9 Negative equity 0.068 0.239 -0.011 -0.037 -0.053 -0.085 -0.258 0.393 1.000 10 Negative income -0.289 0.326 -0.160 -0.143 0.083 -0.605 -0.222 0.143 0.258 1.000 Mean 1.501 10.142 0.078 0.036 0.071 29.700 0.643 0.574 0.036 0.357 Std. Dev. 0.797 3.159 0.882 0.198 0.262 22.265 0.488 0.270 0.189 0.488 Min 0.684 6 -1.675 0 0 3.774 0.000 0.116 0 0 Max 4.226 20 2.568 1 1 84.055 1.000 1.115 1 1

a) All variables are described in the Appendix, in Table A1.

b) The top half of Table 2 shows the results of a Pearson correlation test. The bottom half of the Table shows the descriptive statistics per variable.

5.2 Hypothesis 1

Table 3 shows the results of the regressions performed to test Hypothesis 1. This Hypothesis suggests that corporate governance is positively associated with firm performance post spinoff. To test this Hypothesis, I regressed the board size against my measure of firm performance.

13 Table 3: Main regression analysis

(1) (2) (3) (4) (5) (6)

Dependent variable: Tobin's Q

1 Board size -0.0148* -0.0139* -0.0152* -0.0152** -0.0152*** -0.0152 (-1.80) (-1.67) (-1.83) (-2.31) (-5.73) (-1.50) 2 Board diversity 0.0130 0.0137** 0.0137 0.0137 0.0137 (1.55) (2.00) (1.48) (1.45) (1.63) 3 CEO = outsider 0.0404 0.0404*** 0.0404** 0.0404 (0.98) (3.26) (2.89) (1.59) 4 CEO = chairman -0.0223 -0.0223 -0.0223 -0.0223 (-0.95) (-1.43) (-1.41) (-0.97)

5 Year fixed effects YES YES YES YES YES YES

6 Industry fixed effects YES YES YES YES YES YES

7 Leverage ratio 1 -0.00610 0.0116 0.0148 0.0148 0.0148 0.0148 (-0.38) (0.72) (0.70) (0.82) (0.69) (0.77) 8 Leverage ratio 2 -0.0177 0 0 0 0 0 (-1.50) (.) (.) (.) (.) (.) 9 Leverage ratio 3 -0.00691 0.00874 0.00886 0.00886 0.00886 0.00886 (-0.77) (0.82) (0.54) (0.62) (0.74) (0.76) 10 Leverage ratio 4 0 0.00432 0.00220 0.00220 0.00220 0.00220 (.) (0.40) (0.11) (0.22) (0.25) (0.19) 11 Negative equity 0.187 0.196 0.201*** 0.201** 0.201* 0.201 (1.43) (1.51) (5.67) (2.12) (1.90) (1.53) 12 Negative income -0.0309* -0.0309* -0.0341** -0.0341** -0.0341*** -0.0341* (-1.75) (-1.79) (-2.50) (-2.16) (-3.55) (-1.83) 13 Constant -0.131*** -0.166*** -0.170 -0.170*** -0.170*** -0.170*** (-5.64) (-6.85) (-1.56) (-8.05) (-6.97) (-6.55) Observations 189 178 171 171 171 171 R-Squared 0.359 0.387 0.400 0.400 0.400 0.400

Root mean squared error 0.0713 0.0718 0.0733 0.0733 0.0733 0.0733

t statistics in parentheses * p<0.1, ** p<0.05, *** p<0.01 a) All variables are described in the Appendix, in Table A1. b) All models have standardized regression coefficients. c) All models have robust standard errors, except model 3. d) model 4 is clustered by industry (1-digit SIC). e) model 5 is clustered by industry (2-digits SIC). f) Each model in Table 3 is a result of OLS regression. Blank spaces show values that were not in included in the regression.

14 The results show that board size has a negative coefficient when regressed against firm performance (β= -.015, p<.1). This suggests that firm performance post spin-off is lower when the board is large. This provides empirical evidence that supports my first Hypothesis.

Model 2 broadens my look at corporate governance, by regressing board size and board diversity against firm performance. In this model, I found no significant results regarding board diversity. Board size however still shows significant results for a negative coefficient (β= -.014, p<.1). In the third model I added the variables for outsider CEOs and chairman CEOs. This model presents a positive coefficient for board diversity with high significance (β= .014, p<.05). Consistent with the first two models board size shows a negative coefficient with significance (β= -.015, p<.1). Both coefficients support my first Hypothesis. However, they do not hold when I take heteroskedasticity into account, as shown in model 6. Models 4 and 5 in Table 3 show results for the same regression, but clustered by industry. Model 4 uses adjusted standard errors based on the first digit of the SIC. The results show that the coefficient of outsider CEOs is positive and significant (β= .040, p<.01). This suggests that the market positively prices the outsider CEO in the post-spin-off period. The model also shows that when clustering by industry the significance of the board size coefficient increases (β= -.015, p<.05). The standard errors in model 5 are adjusted based on the first two digits of the SIC. This creates a greater number of clusters. The results show the same coefficients as model 4, the difference lies in the significance. Model 5 shows a greater significance for the coefficient of board size (β= -.015, p<.01). In contrast to board size, outsider CEOs show a lesser significance (β= .040, p<.05). Based on all models, empirical evidence suggests that the level of corporate governance is positively associated to post-spin-off performance. These results support my first Hypothesis.

15

5.3 Hypothesis 2

Table 4 provides the regression models used to test the second and third Hypothesis. Hypothesis 2 suggests that firm opacity prior to the spin-off has a positive effect on the firm performance post spin-off. Model 1 presents the regression between the measure of opacity and the measure of firm performance. The result shows a positive coefficient with great significance (β= .060, p<.01). Model 2 shows the same regression, but with robust standard errors and adjusted standard errors. The standard errors are adjusted based on the first two digits of the SIC. With the changed standard errors the results show the same coefficient, but with lower significance (β= .060, p<.01). Both models provide empirical evidence that pre-spin-off opacity is positively related to firm performance in the post spin-off period. The result supports my second Hypothesis.

5.4 Hypothesis 3

My third Hypothesis suggests that a focusing spin-off has a positive effect on the relation between the opacity and firm performance. Models 3 to 6 in Table 4 provide evidence on this Hypothesis. Every model still shows significance for the coefficient of the bid-ask spread. However, no evidence was found to support Hypothesis 3.

16 Table 4: Main regression analysis

(1) (2) (3) (4) (5) (6)

Dependent variable: Tobin's Q

1 Bid-Ask Spread 0.0598*** 0.0598* 0.0567*** 0.0576* 0.0576*** 0.0576** (4.28) (1.98) (3.51) (1.78) (3.22) (2.33) 2 Focusing 0.0106 0.0119 0.0119 0.0119 (0.41) (0.23) (0.24) (0.24) 3 Focusing*Bid-Ask Spread -0.00115 -0.00115 -0.00115 (-0.03) (-0.03) (-0.04)

4 Year fixed effects YES YES YES YES YES YES

5 Industry fixed effects YES YES YES YES YES YES

6 Leverage ratio 1 0.0643 0.0643 0.0550 0.0543 0.0543 0.0543 (1.16) (0.93) (0.89) (0.80) (0.59) (0.59) 7 Leverage ratio 2 0.0644 0.0644 0.0561 0.0556 0.0556 0.0556 (1.21) (1.00) (0.96) (0.88) (0.70) (0.66) 8 Leverage ratio 3 0.0867 0.0867 0.0724 0.0715 0.0715 0.0715 (1.43) (1.31) (1.01) (0.89) (0.75) (0.67) 9 Leverage ratio 4 0 0 0 0 0 0 (.) (.) (.) (.) (.) (.) 10 Negative income -0.00847 -0.00847 -0.00919 -0.00916 -0.00916 -0.00916 (-0.28) (-0.33) (-0.30) (-0.29) (-0.35) (-0.43) 11 Negative equity 0.180* 0.180 0.178 0.178 0.178 0.178 (1.80) (1.37) (1.74) (1.65) (1.25) (1.25) 12 Constant -0.282*** -0.282*** -0.224** -0.207* -0.207*** -0.207*** (-3.38) (-3.86) (-2.69) (-2.12) (-2.98) (-3.72) Observations 43 43 43 43 43 43 R-Squared 0.657 0.657 0.660 0.660 0.660 0.660

Root mean standard error 0.0506 0.0506 0.0520 0.0538 0.0538 0.0538

t statistics in parentheses * p<0.1, ** p<0.05, *** p<0.01 a) All variables are described in the Appendix, in Table A1. b) All models have standardized regression coefficients. c) Models 2,5 & 6 have robust standard errors.

d) Models 2 & 5 are clustered by industry (SIC 2-digit).

e) Each model in Table 4 is a result of OLS regression. Blank spaces show variables that were not in included in the regression.

f) Variable ‘Focusing*Bid-ask-spread’ shows the interaction between the variables ‘focusing’ and ‘Bid-ask-spread’.

17 6. Discussion and conclusion

My study expands the literature by taking determinants of corporate governance pre-spin-off and analyzing whether these impact the post-spin-pre-spin-off performance. My analysis included 189 firm-year-observations between 1999 and 2018. The full sample resides in the United States and only included unique companies. I found that firms with high corporate governance in the year prior to the spin-off experience greater performance results in the year after the spin-off. In addition, I researched the relation between opacity pre-spin-off and post-spin-off performance. This resulted in finding a positive relation, indicating that high opacity pre-spin-off indicates better firm performance post-spin-off. Thirdly, I researched a moderating effect of a focusing versus a non-focusing spin-off on the relation between opacity and firm performance. In this test I found no significant evidence to support my Hypothesis.

My results show a negative relation between board size pre spin-off and firm performance post off. This suggests that larger boards are crowded by efficiency issues before the spin-off. After the event, these inefficiencies are no longer an issue. This is consistent with earlier studies, which show a negative relation between board size and firm performance. This suggests that smaller boards are more effective (e.g. Bozec, 2005). Furthermore, I researched the relation between board diversity and firm performance. Consistent with current literature I found a positive relation between board diversity pre spin-off and post-spin-off performance. This suggests that board diversity tends to increase the quality of decision making, which leads to better firm performance (Erhardt, Werbel & Shrader, 2003). Subsequently, I researched whether the position of the CEO influences firm performance. I found empirical evidence that a CEO as an outsider has a positive effect on firm performance. This is consistent with existing literature. In my sample only 7 percent of the companies had one person fulfilling the role of CEO and chairman. This also

18 explains why there was no significant result found for the relation between the CEO-chairman variable and post-spin-off performance. Summarizing these results, I can conclude that corporate governance pre-spin-off has a positive effect on post-spin-off firm performance.

Firm opacity is one of the most coveted investor protection rights. The results following my test of the relation between firm opacity and firm performance, show a positive effect. This is consistent with current literature, which suggest that higher opacity leads to a better understanding of the market value (Anderson, et al., 2009). In the context of spin offs this suggests greater investor confidence and fewer hurdles to invest. My result however was achieved over a low amount of observations. Therefore, my suggestion for future research is to test the firm opacity in the context of spin-offs with a larger sample. For my study I can conclude that my expectation was true. Firm opacity pre-spin-off has a positive effect on post-spin-off performance. I did not find evidence that this relation is strengthened by a focusing spin-off versus a non-focusing spin-off.

By using several determinants of corporate governance, I expand existing literature. The determinants itself were derived from earlier research and fitted to the available data. The sample that I used was rather small and only contained data from US-firms. Further research could focus on taking different indicators of corporate governance and analyze whether they impact the post-spin-off performance. This could deliver further implications for financial analysts, credit market rating agencies, shareholders and company executives.

19 7. Acknowledgements

First of all, I thank my thesis supervisor V.A. Porumb for the guidance and supervision through the process of writing my thesis. Secondly, I thank my student colleagues for their support in the process. Finally, I thank my employer, Bentacera, for granting me the time to write this thesis.

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22 Websites https://www.bloomberg.com/news/articles/2019-05-08/now-you-see-it-now-you-don-t-the-great-dismantling-of-siemens https://www.timesunion.com/business/article/After-GE-Power-debacle-Siemens-spinning-off-13828872.php https://www.ft.com/content/33f5fa4e-1121-11e6-91da-096d89bd2173 https://asia.nikkei.com/Business/Companies/Panasonic-to-spin-off-security-camera-business-as-costs-weigh Appendix Table A1

Variable definitions & measures

Category Measure Measurement

Firm-specific variables Tobin's q Indicator value for firm performance

Total market capitalization _{Sum of a firm's tangible and} intangible liabilities

Total assets _{Total value of a firm's assets,}

expressed in dollars

Total liabilities _{Total value of a firm's liabilities,} expressed in dollars

Book value of shares outstanding _{Total value of all shares}

outstanding, expressed in dollars

Corporate governance Board size Total number of directors on the board

Board diversity Principle component analysis of

total number of outsiders on the board, the gender ratio and the nationality mix.

Total outsiders on board _{Total number of independent} directors on a board

Gender ratio of board _{Ratio of male board members over}

total numbers of directors

Nationality mix _{Ratio of single nation members over}

total number of directors

CEO = outsider Indicator whether the CEO is an

outsider

CEO = chairman Indicator whether the CEO and

Chairman of the Board are the same person

23 Continued from page 22

Corporate opacity Bid-ask spread _{The average of the average bid price} and ask price, calculated over a year

Focusing Spin-off _{Indicator whether the spun-off}

resides in a different industry

Control variables Leverage ratio Ratio of total liabilities over total assets

Negative income Indicator whether the company

made a loss

Negative equity _{Indicator whether the company has}