Do dual board directors determine post spin-off performance of parent and spun-off companies?

Do dual board directors determine post spin-off performance of

parent and spun-off companies?

Author Tjebbe Aukes Student: 3774562 Supervisor Vlad-Andrei Porumb Abstract

This paper investigates the impact of dual directors on the post-spin-off performance of parent companies and of their spun off entity. Specifically, I assess how investors react to the instalment of dual directors on the board of directors of the spun off. Generally, the existence of dual directors is positively associated with the performance of spin-offs, but in this paper I investigate if there are differences in the long term spin-off relation compared to short term and potential differences when the spin-off is related to a focusing strategy of the parent company. I proxy for the market performance of both the parent and the spun-off by Tobin’s Q. In the regression analysis I find that dual directors have a positive short term effect on the parent’s market performance. Nonetheless, I find that dual directors have a negative long term effect on the parents firms’ market performance. Moreover, a business focusing strategy has no significant influence on the effects that dual directors have on the market performance. Overall, my results suggest that dual directors are installed on behalf of the parents. Spun offs gain no significant benefits. For increased market performance, dual directors should be replaced once the initial spin-off is settled and the spun off becomes independent as dual directors have a negative effect on the long term market performance of the parent.

Key words: Spin-off, Directors, Board of Directors, Market Performance

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INDEX

1. INTRODUCTION 3

2. THEORY BACKGROUND 5

2.1. General spin-off characteristics 5

2.2. Importance of the board & dual directors 6

2.3. Transaction Cost Economy 7

2.4. Resource dependency 8 2.5. Board Independence 8 2.6. Focusing strategy 9 2.7. Hypothesis development 9 3. METHODOLOGY 11 4. RESULTS 13 5. DISCUSSION 15 5.1. Results 15 5.2. Theoretical contribution 16 5.3. Conclusion 16 6. REFERENCES 18 7. TABLES 20

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1. INTRODUCTION

Corporate spinoffs represent corporate divestitures which result in the separation of a subsidiary company from the parent firm. During a spin-off, the shares of the subsidiary are divided on a pro-rata approach between the shareholders of the parent firm. This practice is economically significant, the volume of spin-offs totalled $257 billion in 2015 (Wachtell, Lipton, Rosen, 2016). Large corporations often capture the attention of stakeholders when they announce large spin-offs. For example, in 2015 Bayer spun off Covestro, which was their business unit that focused on the development of polymers. This lead to an increased strategic focus on their healthcare and crop science (development of seeds for agriculture) business units (Terry, 2015). Bayer raised €2.5 billion with an IPO for Covestro and in 2018 sold its remaining stake of 14% for another €2.2 billion.

Strategic focus is often one of the reasons corporations consider a spin-off, and this implies that the spin-off has to perform on its own, as the parent focuses on its core business. In reality this is nonetheless not always the case, as spun offs and their parents remain related, as spun-offs use their parents for development and market entries (Klepper & Sleeper, 2005). In some cases, parent firms install dual directors to have a form of control over the spun off (Feldman, 2016). While Feldman (2016) focuses on the short term effects of dual directors, their influence may change in the long term, as the ownership of the spun offs could change once the spinoff is completed, In turn, this gives the current shareholders the opportunity to makes changes on the board of directors (McDonough, 2017). There has been much research on the characteristics of the board of directors. Dual directors can be seen as a form of decreasing board independency and the scientific results on decreasing board independency are contradictory. There are theoretical explanations for both a positive and negative relation between the parent and the spun off. Research on dual directors find positive firm performance when the parent firm installs a dual director. The control that a parent has over the spun off is regarded to be positive on short term firm performance (Feldman, 2016). While research on board independency found that the equity market values independent board members more than dependent board members (Nguyen & Nielsen, 2010).

This research should explain if spin-off situations are an exception on the research of Nguyen & Nielsen on board independency or if there are other explanations. Previous research has found evidence for short term effects of dual directors but there is lack of research on the long term effects of dual directors. This research will study the long term effects of dual directors. The long term effects of dual directors are interesting as the board of directors has large influence on the performance of an organization and the role that a dual director has between the parent and spun off is dynamic and it is possible that it will change over time. The results of this research are interesting for investors and analysts as it will provide them with useful information on valuating the spin-off. As valuations are

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based upon expectations of the future it is important to understand what long term effects dual directors have on the market performance of spin-offs. My resulting research question is:

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2. THEORY BACKGROUND

2.1.General spin-off characteristics

A spin-off is the separation of business units by creating one or more publicly traded companies. The separation lowers the value of the parent, current shareholders are compensated for this loss by receiving shares in the newly created spin-off company. Spin-offs are popular because investors and directors valuate the separated businesses higher compared to when they are placed within one organization. The spin-offs can be accomplished tax free. To qualify as a tax free spin-off the parent must distribute control of the subsidiary, which generally consists of distributing 80% of each type of voting and non-voting stock. The process of completing a spin-off is complex and during the process the parent has to consider a large amount of financial, legal, tax and governance factors. Which issues arise during the spin-off process depend on the business goals of the spin-off transaction, the continuing relationship and structure of the spin-off. There are five common drivers for a spin-off (Wachtell, Lipton, Rosen, 2016):

Enhanced business focus – allowing each separate business to focus on its own strategy, market and operations without sharing resources with other business units in the same organization (Desai & Jain, 1999). Business appropriate capital structure – each separate business can pursue the capital structure that fits the requirements of the organization the best (John, 1993). Distinct investment identity – A spin-off may be a preferable investment for investors as its strategy and opportunities are more defined without the larger conglomerate around the subsidiary (Burch & Nanda, 2003). Effectiveness of equity based compensation – A spin-off increases the effectiveness of equity based compensation as the effort of directors and employees can be tied more directly the specific organization (Veld & Veld-Merkoulova, 2004). Shareholder activism – shareholders have become a powerful force on a corporate level, and drive value maximizing activities such as spin-offs (Chen & Feldman, 2018).

Typically, the spin-off is created as a wholly owned subsidiary by the parent, before giving out the shares (Wachtell, Lipton, Rosen, 2016). This gives the parent the responsibility to create the spin=offs corporate structure and constitutive documents. If the subsidiary has already been operating as a standalone subsidiary, choosing management may be straight forward, although new managers or compensation programs may be necessary to become comparable to organizations within the same industry.

When the parent chooses to divest, the relation between the parent and spun off is not instantly terminated after completion. As offs are complex processes there can be interactions after the spin-off to completely separate operations. The parent can have up to 20% of ownership post spin-spin-off, so the parents level of control over the subsidiary is limited (Feldman, 2016). Parent ownership post spin-off

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sends a clear signal to investors regarding the future of the spin-off and is positively interpreted by investors, but may be misleading from the perspective of the spun off (Semadeni & Cannella, 2011).

2.2.Importance of the board & dual directors

During the spin-off, the parent firm has the responsibility to appoint the initial board of directors, which can be directors that are also on the parent’s own board of directors. The parent has extensive discretion over the timing and characteristics of the spin-off. Parents do not need to disclose any preliminary spin-off information, therefore once a spin-off is announced it is generally completed. As parents prepare the spin-off completely before announcing all characteristics of the spin-off are interpreted by the shareholders and will affect the market value of the parent when it announces the spin-off. (Wachtell, Lipton, Rosen, 2016).

The main functions of the board of directors are to monitor management and to provide resources (Hillman & Dalziel, 2003). The monitoring function of the board of directors is executed on behalf of the shareholders. Monitoring activities consist of monitoring the CEO, monitoring the implementation of strategic decision and evaluating and rewarding the CEO. Shareholders generally want to maximize the value of their shares in the organization, and appoint directors with the responsibility to control the management so they act accordingly. Management needs to be exposed to a form of control in the case when conflicts arise where the interest of the managers are different from the interests of the shareholders. The need for a monitoring function of the board is underpinned in Agency theory, that describes the conflicts of interest when control and ownership of an organization are separated (Fama & Jensen, 1983). Monitoring management can increase performance as managers are less likely to perform self-serving behaviour (Zahra & Pearce, 1989).

The second function of the board of directors is providing resources to the organization and is underpinned in the resource dependency theory, the theory argues that directors bring resources such as advice & counsel, legitimacy, communication channels and access to external stakeholders (Hillman & Dalziel, 2003; Pfeffer & Salancik, 1978). A director gets appointed to the board of directors because they can support the organization by providing resources that are desired from the shareholders. The logic of RDT is that the resources are directly related to the firms performance as they lower transaction costs due to dependence between the organization and external stakeholders (Williamson, 1995). Previous research on the board of directors and specifically on the effects of dual directors has drawn upon two theories, transactions cost economy (TCE) and resource dependency theory (RDT). This research will use board independency as an explanatory variable for the effect of dual directors on spin-offs. TCE and RDT suggest that the dual directors should have a positive effect while board independency suggest that a director that is dependent on a stakeholder is negatively related to the performance of the spun off. With the relation that the parent and spun off have during and after the

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spin-off, the parent can be considered a large stakeholder in the spin-off. Gulati and Singh (1998) find that representment of the parent’s interest enhances market performance for the parent.

2.3.Transaction Cost Economy

TCE theory is based on transactions that an organization completes with the goal to minimize all the transaction costs. When transactions are completed, decision makers are assumed to have bounded rationality and there appears to be some form of opportunistic behaviour by individuals such as directors or other organizations (Williamson, 1975). The theory of TCE has become well established within the strategic management field over the years after it was introduced (Williamson, 1995). In the relation between parents and spun offs, the decision to install dual directors can be to have control combined with the lowest governance costs within the scope of the parent (Shervani, Frazier, & Challagalla, 2007). Although a spin-off will lead to lower control or higher governance costs for the parent company, shareholders of the parent believe that the spin-offs creates value as the economic benefits are higher than the governance costs as the subsidiary is undervalued when it is still within the parents organization (Barclay & Holderness, 1991). Another rationale for the shareholders is that the spun off is more capable to perform well when it is acting independent (Kang & Sorensen, 1999).

However, Semadeni & Cannella (2011) argue that in a spin-off situation the spun off will suffer losses as they have lower economies of scale in the new situation. This will result in losses on the capital market, and when it concerns a previously vertical integrated subsidiary there will be losses of economy and integration. These losses are decreased by a continuous link to the parent firm. An example of such a continuous link can be the instalment of a dual directors on the board of directors on the spin-off company. When dual directors are appointed their history with the parent firm gives them high status on the spin-off board, which they can use to make decision that are in the interest of the parent firm (Feldman & Montgomery, 2015) and thus creating a relationship that is similar as the relationship that existed before the spin-off was completed. Dual directors are a substitute for the direct control that the parent had (Shervani et al., 2007). Gulati & Singh (1998) argue that within this hierarchical structure dual directors chose not to use their power to actively for the parent’s interests and strategical goals. Instead they chose an indirect way to represent the parent’s interest and act as a communication channel. In the same research, Gulati and Singh (1998) also found that the level of hierarchical control was influenced by the interdependence of organizations. This would suggest that a spin-off that is enforced to increase the focus of the parent would result in a lower level of hierarchical control. Which could have a different effect on the market performance of the spin-off. Feldman argued that TCE alone cannot fully address how dual directors exercise their power on behalf of parent or spun off (Feldman, 2016).

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2.4.Resource dependency

Resource dependency theory (RDT) theorizes that leaders of organizations are only accountable for a small part of the variances in performance and that the variance in performance will mostly be explained by the context of the organization and the organization’s dependence on resources from outside groups (Pfeffer & Salancik, 1978). The presence of dual directors can help spin-offs when the strategic direction that is given by the dual directors is in the parents interest but also in the spun off’s interest (Seward & Walsh, 1996). Shervani, Frazier and Challagalla (2007) argue that the parent has more market power and that the spun off with lower market power is receptive to the guidance from a “stronger” organization, which would lead to desired outcomes for the parent. The advisory role that the board of directors has in the organization is enhanced by the expertise that dual directors bring and the strategic resources they control with the relationship to the parent firm as a stakeholder in the spin-off (Adams & Ferreira, 2007). Evidence from Certo, Daily and Dalton (2001) shows that a prestigious board has an enhanced performance during their initial public offering, suggesting that investors do value dual directors that bring experience. Research shows that there are problems within the relationship of organizations with different levels of market power, where the most powerful partner will appropriate more of the benefits from an exchange to itself (Piskorski & Casciaro, 2005). When resources and power are hard to obtain, the stronger organizations such as the parents in a spin-off will deliberately try to move resources away from the weaker organization (Kim, Hoskisson, & Wan, 2004). This may imply that in a spin-off situation the positive effects of the dual directors are on account of the parent itself. Equally to the TCE theory, with RDT there is arguably a difference on market performance when the spin-off is made due to a business focus strategic decision as the dependence on resources from the parent may be lower for the spin-off when they are active in different markets and thus the dual directors are valuated differently.

2.5.Board Independence

Evidence from Semadeni and Cannella (2011) shows that the level of monitoring from the parent affects the market performance of the spun off. Monitoring from the parent increases the market performance of the spun off, but a low degree of monitoring has a higher positive effect in comparison to a high degree of monitoring. Dependent boards are less likely to properly monitor management because there is a disincentive from the perspective of the dependant boards to oppose management of the organization (Hillman & Dalziel, 2003). Investors value independent directors, Nguyen and Nielsen (2010) argue that a sudden death on the board of directors had a general negative effect of the market value of an organization and this negative effect is significantly stronger for independent directors compared to dependent directors.

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2.6.Focusing strategy

A spin-off is related to a parents organizations focus strategy if the spun off subsidiary is not vertically integrated as a business unit before the spin-off, or when the parents revenue streams become less spread out between different market segments after the spin-off. When spun offs are closely related to their parent pre spin-off, such as in a vertical integration setting or related diversification, investors value dual directors positively because the parent has information on the strengths and future of the spin-off based on information that is not publicly available (Semadeni & Cannella, 2011). Although dual directors are value creating in general, this is driven by cases where the spun off organization has low dependence on the parent firm (Feldman, 2016). The value of resources such as advice and connection to external stakeholders are lower when the spin of is executed to increase focus for the parent (Hillman, Keim, & Luce, 2001).

Potential economies of scale are less useful when two organization operate in different industries. This will make a continuous link between the parent and spun off redundant (Semadeni & Cannella, 2011). Feldman and Montgomery (2015) found that the history with parent firms give dual directors high status on the spin-off board, however this effect is mitigated when their experience with the parent has less use on the board of the spin-off because the organization.

2.7.Hypothesis development

The theory on dual directors and their effect on the market performance of both the parent as the spun off is contradicting, therefore I choose to keep Hypothesis 1a and Hypothesis 1b unidirectional. I expect that the effect of dual directors changes over time as the spun off acts more independent and has a lower need for support from the parent.

H1a: Dual directors impact the market performance of spin-offs in the year post spin-off period (short term).

H1b: Dual directors impact the market performance of spin-offs after the three year post spin-off period (long term).

I expect that different results will occur when the spin-off is related to a focus enhancing strategy. As the parent’s and spun off’s have different interests and act in different industries, dual directors may have a different impact on the market performance. From a RDT perspective it would appear that dual directors bring less resources to the board of directors on the spun off. When the parent and spun off are not related in business with each other the dual directors may act more independent, which is positively valued by shareholders. Additional to Hypothesis 1 I want to analyse focus enhancing spin-offs

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specifically as I predict different results compared to Hypothesis 1. As the theory that explains potential differences for focus related spin-offs is contradictory, I keep Hypothesis 2 unidirectional.

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3. METHODOLOGY

The question that I answer in this thesis is: Do dual board directors determine post spin-off performance of the parent and spun-off companies? Within this research question the dependant variable is market performance. The independent variable are the dual directors on the board of directors in the spun off. The effects of a focus increasing spin-off act as a moderating variable for the second Hypothesis. I derived the data from multiple databases, the sample list of spin-offs was obtained from SDC platinum. Financial information was obtained from Compustat, and information of the board of directors was derived from Boardex.

The sample consists of US firms that have completed a spin-off. A total of 496 unique spin-offs where observed. All observed spin-offs were completed between January 1, 1999 and December 31, 2018. I observed 35 situations where the parent company installed one or more dual directors on the board of the spun off company. I observed 197 spin-off situation where related to a focussing strategy of the parent company.

The dependent variable of market performance was measured with Tobin’s Q. Tobin’s Q is a market value equation which measures the ratio of the market value of the firm to the replacement cost of its assets. A firms market value is the sum of the value of common stock, preferred stock and total debt (Hawn & Ioannou, 2016). Short term market performance is the Tobin’s Q in the year of the spin-off. Long term market performance is the Tobin’s Q three years past the spin-off. This theory is often used to calculate the performance of publicly listed firms as it shows how investors value the firm compared to its underlying book value (Gertner, Powers, & Scharfstein, 2002). A high Q score means that the value of the stocks is higher as the underlying value of assets, Q is considered high if it is higher as 1, which would imply that investors are willing to pay more for the stock than the underlying value of assets.

The independent variable is the presence of dual directors in the spin-off firm. I analysed the Boardex data by tagging directors that had multiple observations in each year as duplicates, if the duplicates had the identifying tag of both the parent and spun off, I created an indicator variable for that director. The variable was 1 if at least one of the directors is a dual director. I did not make a distinction between one or multiple dual directors on the board of directors.

The moderating variable in Hypothesis 2 is the presence of a focus increasing strategy for the parent of the spin-off. This was measured by using the SIC codes. SIC codes are the “Standard Industrial Classification” codes. It is a four digit code that was established in the US. If the SIC codes of the spun off is different from the SIC code of the parent firm the spun off is related to a focus increasing strategy of the parent, as the different SIC code implies that the parent and spun off are not within the same

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industry and thus the focus of the parent company increases. This variable was an indicator variable, if the SIC codes of the parent and spin-off were different the variable was 1. There are different methods of measuring focus, but these methods, such as the Herfindahl index give similar results compared to the comparison of SIC codes (Desai & Jain, 1999).

I installed several control variables. Firm size is represented by the total assets organization, this is commonly used control variable in many studies on the subject of spin-offs (Feldman, 2016) as regression results may be influenced by the size of an organization. Financial leverage is the level of debt an organization has to funds its assets. An organization that has more debt than equity to finance their assets is considered highly levered. Results on performance can be different for highly levered organization so I control for financial leverage with a debt to asset ratio. I installed several control variables on the board level of the organizations, next to the dual director indicator variable. I controlled for the number of directors that is on the board as it may influence the impact a dual director can make on the board. I controlled for the influence of a CEO that is also a chair member on the board of directors as it might influence the effects of a dual director on the board. Next to those I added more general control variables for the board of directors, which were the nationality mix and gender mix of the board of directors.

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4. RESULTS

Table 1 presents the regression analysis of Hypothesis 1a and 1b. With Hypothesis 1a I want to analyse what the impact is of dual directors on the short term market performance of a spin-off, I analyse both the impact on parent’s market performance as the impact on the spun off’s market performance. Beforehand I predicted that dual directors will have impact on the market performance but remained undecisive if it would be either positive or negative. The results of the short term market performance regression analysis show that the dual directors have a significant positive impact on the short term market performance of the parent companies as the coefficient is 0.5085 with a standard error of 0.2282. For the spun offs the results are insignificant but negative. A larger study can find significant results as the sample of spin-off companies is smaller due to the lower availability of financial information on spun offs.

[insert table 1 here]

As the results of the regression analysis for spin-off companies are insignificant I cannot completely accept Hypothesis 1a. The short term market performance is significantly positive for parent

companies installing dual directors in their spin-offs, with a coefficient of -0.6755 with a standard error of 0.3240. Parents company are generally larger compared to the spun off, this can an argument that there is evidence to reject Hypothesis 0 and accept Hypothesis 1a.

Table 1 also present the regression testing of Hypothesis 1b. With Hypothesis 1b I want to analyse what the impact is of dual directors on the long term market performance of an spin-off, I analyse both the impact on parent’s market performance as the impact on the spun off’s market performance. I predicted that the long term effects of dual directors on market performance would differ from the short term performance. I have found different results compared to Hypothesis 1a, The presence of dual directors in the long term has a significant negative impact on the market performance of the parents. For the spun offs I have insignificant evidence of market performance effects when dual directors are installed in the board of the spun offs.

Equal to Hypothesis 1a, the regression analysis for the spun offs is insignificant, thus I cannot completely accept Hypothesis 1b, The long term performance of parents is significantly negative. In the discussion I will argue why the Hypothesis should be accepted although it is insignificant for the spin-off companies.

In table 2 I present the regression analysis of Hypothesis 2. With this Hypothesis I analyse the moderating influence that dual directors have on the market performance of a focus enhancing spin-off. I predicted that the impact of dual directors would be change the increased market performance of focus enhancing spin-offs. I found no significant evidence that a focus related spin-off has different market

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performance when a dual director is installed on the board of directors of the spun off. Thus I cannot accept Hypothesis 2.

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5. DISCUSSION

5.1.Results

In this section of the thesis I will discuss the results of the regression analysis, analyse my findings and answer the research question. The research question that I try to answer in this research is:

Do dual board directors determine post spin-off performance of the parent and spun-off companies?

In the theory section I discus several theories that may explain the effects that I observed in the results of the analysis. The main theories that can explain the effects of dual directors in spin-offs are the Transaction cost theory and the resource dependency theory. The observation that parents have an improved short term market performance while spun offs show no significant difference, can be interpreted as an incentive for parents to install dual directors in the spun offs. As the parent company is responsible for the instalment of the board of directors in the initial phase of the spin-off (Wachtell, Lipton, Rosen, 2016), it would be expected to observe more dual directors in spun offs. The results of short term market performance are more likely to be explained by transaction cost theory as resource dependency theory. In a resource dependency perspective I would expect that most benefits are gained by the spun off while the short term performance for spun offs turned out to be insignificant. When parent companies lose the control over a subsidiary because it is spun off, they opt for a different form of control in the form of dual directors. Looking at the short term market performance it is arguably that dual directors act on behalf of the parent as I find significant positive results for their short term market performance. This research is also evidence for the arguments that Piskorski and Casciaro (2005) made in their research, that organizations with a higher level of market power will appropriate more of the benefits to themselves. It is interesting that once spun offs become more independent in the long term, this effect diminishes. Shareholders value the signal of the instalment of dual directors positively, because it insinuates that the relationship between the parent and spun off is not directly terminated. This findings are opposed by the claims of Nguyen & Nielsen (2010) who found that independent directors have a positive effect on the shareholder value of an organization. Although Hypotheses 1a and 1b can only be partly accepted, as the regression results for the spun offs are insignificant, taking in account the average size of spun offs compared to parent companies, it is arguably that the total results are significant as parents in this sample are on average 19 times larger in total assets compared to the spun offs. Market performance differences will have a larger impact for parents.

The findings on the regression analyses for Hypothesis 1b, are opposite to Hypothesis 1a. The long term market performance for parents turned out to be significantly negative. I found no significant results for the spun offs market performance. A possible explanation can be that over time the

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relationship becomes of less use and the spun off became more capable to act independently and shareholders devalue the strong relationship the parent has created by installing dual directors. Certo, Daily and Dalton (2001) found that during an initial public offering, investors give value to an experienced board, I also find these results in this research as the short term results appear positive. This research gives evidence that shareholders do not value an experienced board for the long term market performance, and it even has negative effects on the parents market performance in the long term. A potential explanation could be that the experience of the board members is useful in the initial phase of the spun off, but in the long term has no beneficial effects for creating shareholder value. Another explanation could come from board dependency theory that states that dependent directors are less likely to execute a proper level of monitoring.

For the focus strategy related spin-offs I found no significant evidence that a strategic focus related spin-off moderate the effects a dual director has on the market performance of spin-off companies and their parents. For parent companies this is important information as enhancing business focus is one of the main drivers for spin-offs. With this information organization that are currently in the process of a process do not have to consider the business focus driver when they are considering installing a dual director.

Dual directors partly determine the post spin-off market performance for parent companies, but do not determine the market performance of the spin-off company itself.

5.2.Theoretical contribution

This research contributes to academic theory by looking into the roll a dual director has on the board of director in spin-off companies, this has been done previously by other researcher but mainly on the initial phase of n spin-off. This research tried to observe the long term effects of dual directors, which appear to be divergent to the short term effects. Although I created some insight in the long term effects, my measurements were static while the influence a dual director can have on the board of directors lies within a very dynamical process inside the boardroom. Future research should focus on how dual directors executed their power to gain benefits for the parent.

5.3.Conclusion

This thesis has drawn on theory of TCE, RDT and board independency theory, how dual director influence the market performance of spin-offs and what parent companies can perform to keep some form of control over the spin-off company, for the parent this leads to short term gains in market performance but at the cost of losses in market performance in the long term. It is hard to measure long term effects of a spin-off, the research has been done with Tobin’s Q as proxy for market

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performance, it is a good measure for market performance as it takes in account the shareholders valuation and the company its equity, but it is complicated to measure the exact effects of dual

directors over the long term as other events may influence the market value and equity value. With this research I have illustrated that the role of a dual director changes over a longer period of time. The results suggest that the parent has an incentive to install a dual director to the board of the spun off. Once the spun off is acting independently, shareholders should vote to remove the dual director from the board. The resources that dual directors provide during the initial phase of the spin-off lose their value once the spun off is acting independently, the advice that the dual directors can give is only valuable for the initial start of the spun off and shareholders negatively valuate the fact that the parent will deliberately move resources from the spun off to the parent. An independent director will provide the board of the spun off with better resources and is more likely to provide better monitoring on behalf of the shareholders.

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7. TABLES

Short term market performance Parent

Long term market performance Parent

Short term market performance Spinoff

Long term market performance Spinoff Dual Director 0.5085** -0.6755** -0.7048 0.5657 (0.2282) (0.3240) (0.7617) (0.7485) Financial leverage 0.0890 -0.8203 -0.5626 -1.5946 (0.3957) (0.5200) (2.0098) (1.5617) Firm size 0.0000 -0.0000 (0.0000) (0.0000) Board size 0.1634*** -0.0011 (0.0354) (0.0418) CEO is Chairman -0.6412 -0.0628 (0.6872) (0.6937) Board nationality -0.5425 0.6767 (0.4209) (0.5436) Board gender 0.5384 -0.4628 (0.8213) (1.1970) Constant -1.7576* 0.6260 0.8561 0.0657 (0.8924) (1.2647) (0.5506) (0.4816) Observations 125 80 21 29 R-squared 0.2923 0.0969 0.0793 0.0851 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

21 7.2. Table 2

Table 2

Hypothesis 2

Variable

Short term market performance Parent Dual Director 0.6841** (0.3302) Strategic Focus 0.2510 (0.1904) Dual Director#Strategic focus -0.3789

(0.4642) Financial leverage 0.0871 (0.3982) Firm size 0.0000 (0.0000) Board Size 0.1495*** (0.0369) CEO is Chairman -0.8255 (0.7018) Board nationality -0.4703 (0.4352) Board gender 0.3660 (0.8326) Constant -1.5884* (0.9018) Observations 125 R-squared 0.3035

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