Corporate Spinoffs and Parent Firms’ CSR Performance

Corporate Spinoffs and Parent Firms’ CSR

Performance

Combined thesis Accountancy and Controlling

University of Groningen, Faculty of Economics and Business

Name: Jorik Meijer Student number: 2971380

Address: Oude Almeloseweg 6; Tubbergen Phone Number: 0631387667

E-mail: jorikmeijer97@gmail.com Word Count: 5179

Thesis Supervisor: V.A. Porumb Field of study: Accountancy and Control

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Corporate Spinoffs and Parent Firms’ CSR

Performance

ABSTRACT

Corporate spinoffs represent significant events that change the structure of a company, through a divestiture of assets. Among other benefits, spinoffs can reduce both firm complexity and information asymmetry. While extant literature highlights the positive financial performance implications of a spinoff, the effects on CSR performance have not been explored. This is an important omission, since reduced firm complexity could make it easier for firms to integrate CSR policies. Moreover, reduced information asymmetry makes CSR practise more visible for stakeholders, and therefore it would be more rewarding to do CSR projects. On the other hand, according to the attention-based view of the firm, due to the complexity of spinoffs, less resources would be allocated to CSR activities. I draw on a sample of 369 firm year observations, that are related to spinoffs, in the 2006 to 2019 period to perform my empirical tests. Results suggest a negative association between spinoffs and CSR performance of the parent firm, in line with the attention-based view of the firm. This effect is transient, as the CSR level reverts back to the pre-spinoff levels 12 months after the spin-off. Further, I investigate if the size of the spinoff has an effect on the CSR performance and find that larger spinoffs incrementally increases the negative impact of a spinoff on CSR performance. I document that this effect is also transient. Lastly, test results provide no evidence that focusing spinoffs being associated with an incremental effect on CSR performance. Taken together, I document that firms allocate less resources to CSR activities in the one-year post-spinoff period.

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Table of Contents

3.1 Corporate spinoff and CSR performance of the parent firms ... 10

3.2 The spinoff size ... 12

3.3 Focusing spinoffs ... 12 4. Research design ... 13 4.1 Data ... 13 4.2 Dependent variable ... 14 4.3 Independent Variable ... 15 4.4 Control Variables ... 15 4.5 Moderating Variables ... 15 4.6 Methodology ... 16 5. Results ... 16 5.1 Summary statistics ... 16 5.2 Hypothesis 1 ... 16 5.3 Hypothesis 2 ... 17 5.4 Hypothesis 3 ... 17

6. Discussion and Conclusions ... 18

7. Acknowledgements ... 19

References ... 20

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1. Introduction

Spinoffs represent a prevalent type of divestiture, where a company is separated into two or more publicly traded companies. This divestiture type is a highly relevant economic phenomenon, since in 2015 alone the worldwide volume of spinoff transactions amounted to $257 billion (Wachtell et al., 2016). For example, some of the biggest recorded spinoffs are the 2008 Altria group spinoff of Philip Morris International, the 2015 eBay spinoff of PayPal, the 2013 Abbot Laboratories spinoff of AbbVie and the 2000 BCE spinoff of Nortel Networks Corporation. More recently CNH announced that in 2021 they will spin off their truck business.

Literature posits that corporate spinoffs can help to reduce business complexity and hence, the true market value of firms’ segments can be discovered (Chemmanur and Liu, 2011). Furthermore, separated firm segments may attract different groups of investors, matching the businesses and investors more appropriately and efficiently (Vijh, 1994).1 Extensive literature has been studying the implication on financial performance of spinoffs (Krishnaswami and Subramaniam, 1999; Schipper and Smith, 1983), but has largely neglected the effects of a spinoff on parent firms’ non-financial performance, such as Corporate Social Responsibility (CSR) performance. This is very surprising, since CSR is an important component of competitiveness that enables firms to achieve sustainable growth (Dyllick and Hockerts, 2002). This paper focuses on how CSR performance of the parent firm is impacted by a spinoff and therefore fills an important gap in the literature, the formal research question is: Does the CSR performance of a company change after a spinoff?

1_{Studies on corporate spinoffs have identified that diversified firms are valued at a discount} relative to portfolios of single segment firms operating in the same industries (Ahn and Denis, 2004). U.S. firms show a systematic pattern of refocusing since the mid-1980s - according to Comment and Jarrell (1995), this corporate refocussing leads to significant increases in shareholder wealth.

5 A spinoff could affect the CSR performance of a firm either positively or negatively. For example, through reduced firm complexity, CSR policies can more easily and effectively be implemented. On the other hand, in line with the attention-based view (ABV) of the firm (Ocasio 1997), the allocation of resources could be shifted away from CSR activities during important events like corporate divestitures.

To test this effect, I used a sample of 369 firm-year observations of US firms between 2006 and 2019. I find that there is a negative association between a spinoff and CSR performance of the parent firm in the year of the spinoff. In the next year, I find no significant difference in CSR performance of the firm. This is consistent with the argument that, during a spinoff, firm managers allocate less time and resources to CSR activities. Further, I find that a larger spinoff increases the negative impact of a spinoff on the parent company. It means that when a company is dealing with a larger spinoff, incrementally more time and resources are required to perform the spinoff. Therefore, the company has less resources to allocate to CSR activities. In the next year, there is again no significant difference in the CSR performance of the company. When assessing the incremental effects of a focusing spinoff, I find no significant results.

As previously mentioned, CSR is an important component of competitiveness that enables firms to achieve sustainable growth (Dyllick and Hockerts, 2002). Firms can take responsibility for the environmental and social impacts of their business activities while they can also benefit themselves through reducing costs and increasing profitability. CSR has received considerable attention for academic researchers. The existing empirical literature has largely focused on the relationship between CSR and firm performance. These studies suggest that CSR contributes to improving firm performance in many ways, such as a positive brand image, trust building among stakeholders, and through transparent business practices (Weber, 2017; Chen and Wang, 2011; Michelon et al., 2013). Previous literature posits that CSR has a

6 positive impact for companies that change their corporate structure through a merger or acquisition. Furthermore, CSR is an important component for financial analysts in the valuation of companies (Mishra, 2017).

As Gregg Sgambati, head of ESG Solutions at S-Network Global Indexes, in a recent interview with Christopher P. Skroupa2_{, says: CSR is becoming a “part of the language of Wall} Street”.3 _{According to the 2015 United Nations Sustainable Stock Exchanges Model Guidance,}4 there has been a notable growth in disclosure about ESG5 issues in the last years. Nowadays, investors demand more than just financial information, and ESG reporting is way to address these demands.

This research is likely to be of interest to either academic researchers and other users of financial information like practitioners, for the reason that spinoffs have become increasingly common in recent years. From a strategic point of view is it important for a CEO that when he is thinking of a corporate divestiture, that he knows the consequences from a non-financial perspective. This thesis advances understanding on the consequences of a corporate spinoff since it represents, to my knowledge, the first paper that focuses on how changes in corporate structure have an impact on divesting firm’s non-financial performance. I show that there is a decrease in CSR performance in the parent firm in the year of a spinoff, however this is not a lasting effect. Since, no significant change in CSR performance is found in the year after the

2 _{Skroupa, C.P. (2018). Define Metrics for ESG, CSR And The Like, And You’ll Grab Wall Street’s Attention.}

Forbes, https://www.forbes.com/sites/christopherskroupa/2018/02/06/define-metrics-foresg-csr-and-the-like-and-youll-grab-wall-streets-attention/#7d3fe08d5444

3 _{Sgambati is in charge for the firms environmental, social and governance (hereafter, ESG) products, which}

produce ratings and ESG indexes. For the reason that ESG has a quantifiable nature, it helps managers with their investment decisions by integrating sustainability into their decisions. ESG is also used by large investors to assess corporate sustainability, making it a “part of the language of Wall Street”.

4 _{Sustainable Stock Exchanges Initiatives. 2015. Model guidance on reporting ESG information to investors.}

Retrieved from: http://www.sseinitiative.org/wp-content/uploads/2017/06/SSE-ModelGuidance-on-Reporting-ESG.pdf

7 spinoff has occurred. This strengthened the expectation that the firm is shifting the attention away toward the divestiture, to make sure that the divestiture is done correctly.

Moreover, CSR reporting has become more important in firm valuation around the world (Fernandez-Feijoo, Romero and Ruiz, 2018). For this reason, it would be interesting to see the CSR performance of firms after a spinoff. I contribute to the CSR literature (e.g., Ioannou and Serafeim, 2012; Jackson and Apostolakou, 2010; Bacha and Ajina, 2019), because I explore how CSR performance of companies is affected by important changes in their structure. Previous studies have found the positive effects that CSR has on a company, and managers and researchers see the added value of CSR (Jang, Chung, and Woo, 2009). However, no research on the CSR performance after the spinoff has been done. Similarly, I contribute to the spinoff literature (Krishnaswami and Subramaniam, 1999; Desai and Jain, 1999; Veld and Veld-Merkoulova, 2004), because I assess how non-financial performance (CSR performance) is affected by a spinoff, whereas spinoff literature mostly looks at the financial performance after a spinoff. In addition, I also contribute by assessing how the main relation is affected by spinoff characteristics such as focusing and relative size.

In the following sections of this thesis, I will elaborate on the theoretical framework and hypothesis building, followed by the research design, and the empirical results. Finally, I will interpret the results and draw my conclusion.

2. Theoretical framework

2.1 Characteristics of Spinoffs

A spinoff occurs when an existing company allocates a part of its assets, liabilities, and operations to legal separate and new publicly traded company (the spun off). The shares of the spun off are issued proportional to the existing shareholders of the parent, on the basis of how many shares in the parent the shareholder holds, also called a pro-rata basis. This transaction is

8 done without an exchange of cash, so that a distribution is tax-free to the parent and its shareholders. The shareholders continue to hold their pre-existing claims to the company of the former combined entity, while their claims are now represented by stock holdings in two or more companies instead of one.

Spinoffs differ from other types of divestitures on several levels. For example, equity carve-outs and spinoffs involve the issuance of new shares, however with an equity carve-out the shares of the subsidiary are sold to outsiders, instead of distributing the shares to existing shareholders on a pro-rata basis. As a consequence of the distribution on pro-rata basis, the shareholders base in the new firms will be unchanged at inception. In case of an equity carve-out this may not be the case. Thus, shareholders have the opportunity to trade their shares in either the parent or the spun-off independently. For this reason, relative the most beneficial for shareholders, from all types of divestitures, are spinoffs (Bergh and Sharp, 2015). Another characteristic that makes a spinoff differ from an equity carve-out or an asset sale, is that the latter two involve an infusion of funds into the parent company. While a spinoff does not include an infusion of funds into the parent company. For this reason, carve-outs and assets sales are usually preferred by financially distressed firms as divestiture method (Bergh and Sharp, 2015).

Prior research in the field of corporate spinoffs has found several reasons for a spinoff. First of all, spinoffs are done to reduce information asymmetry (Habib et al. 1997; Krishnaswami and Subramaniam, 1999). By reducing the information asymmetry, the market value of the firm increases. Secondly, research found evidence on the efficiency enhancing effect of spinoffs (Ahn and Denis, 2004; Chemmanur et al., 2010). This supports the idea that conglomerates, large diversified firms, are coping with efficiency issues. This diversification causes firms to be undervalued (Veld and Veld-Merkoulova, 2004). This furthermore indicated by the increase in stock market performance in the period after the spinoff (Feldman, 2016). Similarly, to increase efficiency, enabling diverse operating units to achieve enhanced focus (Daley et al.

9 1997) is given as reason for spinoffs. Another reason for spinoffs is given by Burch and Nanda (2003), to create distinct investment identities for business components to attract “pure play” capital.

2.2 Stakeholder Theory

Addressing stakeholders’ interest, with investing time and resources, is a rational managerial activity in the concepts proposed in stakeholder theory (Freeman, 1984; Phillips et al., 2003) and stakeholder capitalism (Freeman et al., 2007). As opposed to the former profit-orientated, shareholder value, focus held by businesses in the past (Friedman, 1970; Jensen and Meckling, 1976), the more contemporary acceptance of the broader contribution of a stakeholder gives a moral duty from the organisation towards the stakeholder (Greenwood, 2007). This triggered novel and on-going developments in management thinking and practice (Ferrell et al., 2010). In this new thinking, the social nature of value creation is unmistakeably acknowledged as it promotes focusing management attention to ‘the best that can be created together rather than avoiding the worst’ (Freeman et al. 2007, p. 313). Nonetheless, a clear working definition of stakeholder management can be found in the fundamental dilemma of stakeholder theory, how to prioritise the multitude and diverse stakeholder claims from all actors involved. The main goal for businesses is the duty of concretely identifying to whom they are responsible, and how far that obligation stretches (O’Riordan and Fairbrass, 2008)

According to the modern view of stakeholder democracy, governance and corporate accountability managers are required to take into account the frequently competing rights and interest of all stakeholders, rather than behaving as agents of shareholders. Basically, they are facing the task of balancing competing interests of numerous stakeholders in order to secure the long-term interest of the firm (O’Riordan and Fairbrass, 2014).

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3. Hypothesis development

3.1 Corporate spinoff and CSR performance of the parent firms

Existing literature on the implication of spinoffs focus on the financial outcomes of this important corporate divestiture. Nonetheless, no academic research assessed the implications of a spinoff for non-financial (CSR) performance. This omission is important, since CSR represents a key determinant of company value and is widely used by financial analysts (Mishra, 2017). Existing literature focused on CSR in the context of mergers and acquisitions (M&As). For example, recent studies find that enhanced CSR performance increases the premium acquirers offer (Gomes & Marsat, 2018; Qiao & Wu, 2019). When a company acquires a CSR aware target, an increase in CSR performance is found at the acquiring firm (Aktas et al., 2011; Tampakounis & Anagnostopoulou, 2020). Therefore, when a company changes its structure, like in a corporate spinoff, CSR performance will likely be affected.

A second reason for why a change in corporate structure could lead to a change in CSR performance, could be found in the relationship between a company and its stakeholders. Companies have to engage with its stakeholders. Stakeholder engagement can be described as the practices a company or organisation initiate to involve stakeholders in a positive manner in organisational activities (Greenwood, 2007). Within a broad range of business activities, stakeholder engagement may exist. According to O’Riordan and Fairbrass (2014, p.123): “The impetus behind the use of the term ‘engagement’ in the stakeholder theory and corporate social responsibility (CSR) literatures is the need to emphasize that, for firms merely to interact with stakeholders is no longer sufficient, if, in fact, it ever was. Interaction with stakeholders is a logically necessary activity of business”.

In this regard, CSR stakeholder engagement is a determinant in how an organisation his CSR response is viewed and evaluated by stakeholders (O’Riordan and Fairbrass, 2008).

11 Therefore, it is considered to play a vital part in in development of CSR strategies of a company (O’Riordan and Fairbrass, 2008). Hence, stakeholders are important in the development of CSR strategies and for the reason that stakeholders of a company change after a spinoff this will have an effect on the CSR performance of a company.

On the one hand, spinoffs are likely to be associated with positive CSR outcomes. First, after a spinoff, a firm can have several potential benefits, like avoiding over-diversification problems and increasing its operational focus (Krishnaswami & Subramaniam, 1999;Rajan et al., 2020). In other words, it is easier to operate the company; when it is easier to operate, a firm can distribute resources towards CSR activities more efficiently. Thus, the spinoff is expected to have a positive effect on CSR performance. Secondly, firms have as potential benefit that a corporate spinoff will reduce their information asymmetry towards external parties (Krishnaswami & Subramaniam, 1999). The firms will be more transparent and can disclose their CSR activities easier to the stakeholders. When the CSR activities are more visible, firms will reap higher benefits for CSR investments from stakeholders and companies will be more eager to undertake such CSR activities. Therefore, the reduced information asymmetry has a positive effect on CSR performance.

On the other hand, according to the ABV view of the firm, firm behaviour is the result of how they channel and distribute the attention of managers. The issues they focus their attention on determines their decision-making. The issues the decision-makers focus on depends on the specific situation (Ocasio, 1997). In the specific context of a spinoff, the managers of a firm might be focussed on the restructuring of the company. When the decision-makers are focussed on the restructuring of the company, they might not have the time and resources to focus on the implementation of their CSR activities. Therefore, this might have a negative impact on the change in CSR performance.

12 When take all these arguments together it is unclear if a spinoff has a positive or negative impact on the CSR performance of a company, but it is likely that it will have an impact. Therefore, I hypothesize:

H1: A corporate spinoff impacts the CSR performance of the parent company.

3.2 The spinoff size

When assessing how the size of a spinoff could influence the CSR performance of a company, I build on the framework provided by the ABV. Accordingly, firm behaviour is the result of how firms’ channel and distribute the attention of managers (Ocasio, 1997); the bigger the spinoff, the more time and resource consuming it will be. Therefore, it would be more likely that they will not have the time and resources to implement their CSR activities.

On the other hand, if a spinoff is very large, a company might hire additional managers or consultants in order to guide the spinoff. This might then again lead to more time and resources for the CSR activities, and thus have a positive impact on CSR performance after a spinoff. Moreover, after a spinoff, firms can have the benefits of avoiding overdiversification problems and having a higher operational focus (Krishnaswami & Subramaniam, 1999; Rajan et al., 2020). These benefits could be larger if the spinoff is larger because the parent firm will be smaller after a bigger spinoff. This could make it easier to operate the firm, and thus distribute more time and resources to CSR. Since it is not a priori obvious which of these explanations will prevail in an empirical setting, I formulate the following hypothesis, in an alternate form:

H2: The size of a corporate spinoff will have an incremental impact on the CSR performance of the parent company.

3.3 Focusing spinoffs

Habib et al. (1997) have developed a model that propose an information-based explanation for spinoffs. In their model they predict that spinoffs will increase overall market value due to

13 increasing the number of traded securities, therefore making a more informative price system. A fundamental assumption of their model, nonetheless, is that the distinct divisions involved in a spinoff exists of different types of assets. The information-based model could be viewed as consistent with the findings that value increases from spinoffs are stronger among cross-industry transactions, that are more likely to be associated with dissimilar assets and increases in corporate focus (Daley et al., 1997). They come up with the dissimilarity of assets across divisions in spinoffs will be positively associated with information-related increases in value. These cross-industry divestitures are more often referred to as “focusing” or “focus-increasing” spinoffs. Since a focusing spinoff divest certain industries, the stakeholders that belong to that industry will also be divested. Thus, a focussing spinoff will have a bigger change in stakeholders. Hence, when you combine that with the stakeholder theory, the effect on CSR performance will be stronger. Therefore, the third hypothesis follows:

H3: Focusing spinoffs have an incrementally stronger effect on the CSR performance of the parent company relative to non-focusing spinoffs.

4. Research design

In the following section I will explain what data I use and where I obtained the data. After this, I will elaborate on the dependent variable, followed by the independent variable, the moderating variable for the second hypothesis, the moderating variable for the third hypothesis, the control variables, and lastly, the methodology.

4.1 Data

The sample that I used is constructed by combining different datasets. The sample construction, as shown in Table 1, shows the construction of the final sample to test the hypothesis. The starting sample from Compustat consists of data of listed firms from the United States between 2006 and 2019. This includes 172,917 firm-year observations. This was merged with the data

14 from SDC Platinum. The SDC platinum dataset contains data on 3,396firm-year observations that are associated with spin-off announcements. This dataset contains data from 1981 to 2020. After the merge of these datasets I was left with 2,902 firm-year observations. The data set from Thomson Reuters ASSET4 will be used to obtain environmental, social, and governance (ESG) metrics, the proxy for CSR performance. The Thomson Reuters ASSET4 database is specialized in providing objective, auditable, relevant and systematic CSR information and investment analysis tools. This database collected data since fiscal year 2002. To build their portfolios investors, estimated representing more than €2.5 trillion of assets, integrate CSR data using ASSET4 into their traditional investment analysis. After merging with the ASSET4 dataset, I was left with 1,478 firm-year observations. After eliminating duplicates and irrelevant data, 369 observations where left to test my hypothesis.

(Insert Table 1 about here)

4.2 Dependent variable

The dependent variable will be the CSR-score, proxied by ESG. For this I utilize the ESG dataset from Thomson Reuters ASSET4. Per firm, 900 evaluation points are collected by specially trained research analysts, and according to the guidelines all the primary used data must be objective and publicly available. After the data is collected, the analysts convert it into consistent units to allow quantitative analysis. For environmental factors, the data typically includes information on energy used, CO2 emissions, water recycled, waste recycled and spills and pollution controversies. For social factors, the data typically includes injury rate, employee turnover, accidents, training hours, donations, women employees and health and safety controversies. The 900 data points are used as inputs to an equal-weighted framework in order to calculate 250 key performance indicators (KPI). Subsequently, these 250 KPI’s are organized in 18 categories, with four main pillars: environmental performance score; social performance score; economic performance score and corporate governance score.

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4.3 Independent Variable

The independent variable that will be used is the year of the spinoff. With this variable we can see if the CSR performance changes when a spinoff occurs. To test whether the effects reverse after one year, I included one year after the year of the spinoff as a secondary model.

4.4 Control Variables

In the model we have to correct for variables that could affect CSR. Hence, we add control variables that could have an impact on CSR performance. Return on assets (ROA) is added as a proxy for firm performance, since CSR positively effect firm’s performance (Campbell, 2007). Moreover, Market-to-book ratio and R&D expenses over sales are used as proxies for product characteristics of a firm and the degree to which a firm competes on differentiation (Ioannou and Serafeim, 2012). Furthermore, CSR will be higher for larger firms (McWilliams and Siegel, 2001). Therefore, the variable firm size is included.

4.5 Moderating Variables

For the moderating variable, this thesis will look at the size of the spinoff. The total assets of the spun off are divided by the total assets of the parent company. This variable is added to test my second hypothesis, that the size of the spinoff has an incremental effect on CSR performance.

Secondly, this thesis will look at if the parent and the spun off are operating in the same industry by comparing their industry codes based on the first two digits of the Standard Industrial Classification (SIC). An indicator variable equal to 1 will be made if the spinoff is focussing, the number of business or geographic segments decreases, or a 0 otherwise. This variable is included to test my third hypothesis, that there is an incremental change in CSR performance after a focussing spinoff.

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4.6 Methodology

The method used to perform the empirical testing is the ordinary least squares (OLS) regression. All non-bivariate variables were winsorized and standardized. The models are clustered by company (Parent ISIN-code). In every model fixed effect per year and industry were added.

5. Results

In the following section I will discuss the results of the empirical analysis. I will start with discussing the summary statistics followed by hypothesis 1, hypothesis 2 and hypothesis 3.

5.1 Summary statistics

In table 2 the descriptive statistics of the variables used in the models are shown. It shows that in 13% of the firm-year observations there is a spinoff, and 26% of the spinoffs are focusing spinoffs. The average CSR score of the companies is 57.54. Table 3 shows the correlation matrix, when taking a look at this table we see that there should be no issue regarding multicollinearity.

(Insert Tables 2 & 3 about here)

5.2 Hypothesis 1

Table 4 shows the results of the regression performed to test the first hypothesis. This hypothesis suggests that the CSR performance of a parent company is affected post spinoff. To test this Hypothesis, I regressed the spinoff-year against my measure of CSR performance, proxied by the ESG-score.

17 This result shows that spinoff year has a negative coefficient when regressed against CSR performance (β= -.148, p<.1). This suggests that CSR performance of the parent company post spinoff is lower when a spinoff occurs. Furthermore, no significant effect was found in the year after the spinoff. This provides empirical evidence that supports my first hypothesis.

5.3 Hypothesis 2

Table 5 show the results of the regression performed to test my second hypothesis. To test the second hypothesis I regressed spinoff year, with moderating effect spinoff size, against the CSR performance of a company.

(Insert Table 5 about here)

This result shows a positive coefficient when the spinoff size is regressed against CSR performance (β= .084, p<.01). When taking a look at spinoff year moderated by spinoff size, we see a significant negative coefficient (β=-.035, p<.05). Since this is a negative coefficient, it suggests that a large spinoff increases the negative effect of a spinoff on CSR performance of the parent firm. Furthermore, no significant effect was found in the year after the spinoff.

5.4 Hypothesis 3

Table 6 shows the results of the regression performed to test the third hypothesis. This hypothesis suggests a focusing spinoff has in incremental stronger effect on CSR performance of the parent company, relative to a non-focusing spinoff. To test this hypothesis I regressed spinoff year, with the moderating effect focusing, against the CSR performance of a company.

(Insert Table 6 about here)

This result shows a positive coefficient for focusing spinoff as moderator for spinoff year. However, no significance is found in the for the spinoff year moderated by a focusing spinoff.

18 This means that I have found no evidence to support my third hypothesis. The size of my sample is rather small with 22 focusing spinoffs, this is a potential reason why no significance is found.

6. Discussion and Conclusions

My study expands the literature by assessing how changes in corporate structure - through a spinoff - impacts the CSR performance of the parent company. My analysis included 369 firm-year-observations between 2006 and 2019. The full sample resides in the US and includes only unique companies. I found that parent firms in the year of a spinoff score worse on CSR performance compared to companies that do not have a spinoff in that year. Secondly, I researched a moderating effect of the size of the spinoff on the relation between a spinoff and CSR performance. I found that larger spinoffs increase the negative impact of a spinoff on CSR performance of the parent company. In addition, I researched the moderating effect of a focusing versus a non-focusing spinoff on effect of a spinoff on CSR performance. In this test I found no significant evidence to support my hypothesis.

My results show a negative relation between the spinoff-year and the CSR performance of the parent company. This suggests that a parent company is too busy with the spinoff and therefore neglects its CSR activities. This believe is amplified by the fact that in the year after the spinoff the results show no significant impact anymore. This shows that the negative CSR performance is caused by the spinoff itself and that it is not harmful in the long run. This is in line with ABV, that the managers focus on the spinoff and therefore allocate more time and resources for the completion of the spinoff instead of CSR performance.

The size of the spinoff is another determinant that I have investigated. I found a significant negative effect between spinoff size and CSR performance. This negative effect of a spinoff on CSR performance is again gone in the year after the spinoff. This suggests that with a bigger

19 spinoff more resources go to the spinoff compared with a smaller spinoff, however even the CSR performance of big spinoff will return to normal. This is in line with the ABV.

My results show no significant relation when investigating the moderating effect of a focusing spinoff versus the effect of a non-focusing spinoff. In my sample there were only 22 focusing spinoffs. This might explain why no significant result was found.

By investigating the effects of a corporate spinoff, and characteristics such as relative size and focusing, on CSR performance of the parent firm, I expand existing literature. Furthermore, I give insight to investors and management as to what the consequences are for CSR performance of the parent firm when a spinoff occurs. When investors see this drop in CSR performance, they should consider that it is only a transient effect. From a strategic point of view, it is helpful for a CEO that he knows what will happen from a non-financial perspective.

The sample that I used was rather small and only contained data from US-firms, furthermore I only focussed on the effects on the parent company. Further research could focus on the effects for the spun off firm and how their CSR performance is affected. Furthermore, research could focus on the effects in other parts of the world and see if they find similar results, of find other effects. This could deliver further implications for the users of financial information.

7. Acknowledgements

First of all, I thank my thesis supervisor V.A. Porumb for the useful comments and guidance through the process of writing my thesis. Secondly, I thank my employer, EY, for granting me the time write this thesis. Lastly, I thank my fellow student colleagues for their support in the process of writing my thesis.

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23

Appendix

Table A1 Variable definitions

Variable Definition

CSR-score The ESG-score from Thomson Reuters ASSET4

Spinoff year A dummy variable that is equal to 1 year after the spinoff occurs

Spinoff year plus 1 A dummy variable that is equal to 1 for the year after the spinoff year

Firm size Natural logarithm of total assets (measured each year)

Return on assets (ROA) Net income over total assets (measured each year)

Leverage One minus the ratio of shareholder's equity over total assets (measured each

year)

Market-to-book ratio (MTB)

Market value of equity over book value of equity calculated at fiscal year-end (measured each year)

RD expenses Research and development expenses over sales (measured each year)

Focusing spinoff An indicator variable equal to 1 if the upcoming spinoff is focus-increasing (the

first 2 digits of the SIC-code differs between the parent company and the spun off company)

24 Table 1: Sample construction

Full sample: financial data from US

companies 1999-2018 1 _{Initial sample financial data from US companies 1999-2020 (Compustat,}

November 2020)

172,917

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

November 2020) -170,015

3 Firm-year observations linked to SDC platinum 2,902 4 Less: companies that have no CSR-information (Thomson Reuters

ASSET4, November 2020) -1,424

5 Firm-year observations linked to SDC platinum & Thomson Reuters

ASSET4 1,478

6 Less: non relevant information (observations without enough

information) -1,109

7 Spinoffs with available information on spinoff characteristics

and CSR-information 369

25

Table 2: Descriptive statistics

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

Variables N mean sd min max

Spinoff year 629 0.130 0.337 0 1 Focusing spinoff 629 0.262 0.440 0 1 CSR-score 629 57.54 18.23 21.08 85.96 Firm size 565 8.302 1.909 2.757 12.11 ROA 524 0.0195 0.118 -0.573 0.207 MTB 392 1.017 0.866 0.0337 4.610 Leverage 565 0.590 0.261 0.0598 1.217 RD expenses 520 0.0396 0.147 0 1.159 Spinoff size 521 1.028 0.891 0.00830 12.32

a) All variables are winsorized b) the variables are the following: CSR-score: The ESG-score from Thomson Reuters ASSET4. Spinoff year: A dummy variable that is equal to 1 for the year that the spinoff occurs. Firm size: Logarithm of total assets (measured each year). Return on assets (ROA): Net income over total assets (measured each year). Leverage: One minus the ratio of shareholder's equity over total assets (measured each year). Market-to-book ratio (MTB): Market value of equity over book value of equity calculated at fiscal year-end (measured each year). RD expenses: Research and development expenses over sales (measured each year). Focusing spinoff: An indicator variable equal to 1 if the upcoming spinoff is focus-increasing (the first 2 digits of the SIC-code differs between the parent company and the spun off company). Spinoff size: Total assets of the spun off over the total assets of the parent company

26

Table 3: Correlation matrix

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (1) CSR-score 1.000 (2) spinoff year -0.148 1.000 (3) firm size 0.536 -0.127 1.000 (4) ROA 0.021 -0.049 0.237 1.000 (5) leverage 0.174 0.056 0.336 0.197 1.000 (6) MTB -0.157 -0.028 -0.158 0.444 -0.072 1.000 (7) RD expenses -0.164 0.043 -0.223 -0.326 -0.282 0.034 1.000 (8) focusing spinoff -0.115 0.010 -0.108 -0.093 -0.165 -0.199 0.106 1.000 (9) spinoff size 0.128 -0.037 0.032 0.049 -0.089 0.053 -0.002 0.046 1.000

a) All variables are winsorized b) the variables are the following: CSR-score: The ESG-score from Thomson Reuters ASSET4. Spinoff year: A dummy variable that is equal to 1 for the year that the spinoff occurs. Firm size: Logarithm of total assets (measured each year). Return on assets (ROA): Net income over total assets (measured each year). Leverage: One minus the ratio of shareholder's equity over total assets (measured each year). Market-to-book ratio (MTB): Market value of equity over book value of equity calculated at fiscal year-end (measured each year). RD expenses: Research and development expenses over sales (measured each year). Focusing spinoff: An indicator variable equal to 1 if the upcoming spinoff is focus-increasing (the first 2 digits of the SIC-code differs between the parent company and the spun off company). Spinoff size: Total assets of the spun off over the total assets of the parent company

27

Table 4: Main regression analysis

(1) (2)

VARIABLES CSR-score CSR-score

Spinoff year -0.148*

(0.0861)

Spinoff year plus 1 -0.0265

(0.0727) Firm size 0.622*** 0.632*** (0.122) (0.120) Return on assets -0.114 -0.117 (0.0735) (0.0735) Leverage -0.0821 -0.0914 (0.108) (0.107) MTB -0.0194 -0.0149 (0.136) (0.137) RD expenses -0.101 -0.107 (0.0726) (0.0720) Focusing spinoff -0.197 -0.196 (0.161) (0.160) Constant 0.839** 0.855** (0.354) (0.350)

Industry FE Yes Yes

Year FE Yes Yes

Observations 369 369

R-squared 0.400 0.397

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 a) This model has standardized regression coefficients. c) This model is cluster by company. d) This model is a result of an OLS regression. a) All variables are winsorized b) the variables are the following: CSR-score: The ESG-score from Thomson Reuters ASSET4. Spinoff year: A dummy variable that is equal to 1 for the year that the spinoff occurs. Spinoff year plus 1: A dummy variable that is equal to 1 for the year after the spinoff occurs. Firm size: Logarithm of total assets (measured each year). Return on assets (ROA): Net income over total assets (measured each year). Leverage: One minus the ratio of shareholder's equity over total assets (measured each year). Market-to-book ratio (MTB): Market value of equity over book value of equity calculated at fiscal year-end (measured each year). RD expenses: Research and development expenses over sales (measured each year). Focusing spinoff: An indicator variable equal to 1 if the upcoming spinoff is focus-increasing (the first 2 digits of the SIC-code differs between the parent company and the spun off company). Spinoff size: Total assets of the spun off over the total assets of the parent company

28

Table 5: Regression analysis

(1) (2)

VARIABLES CSR-score CSR-score

Spinoff size 0.0831*** 0.0778***

(0.0257) (0.0252)

Spinoff year -0.139*

(0.0911)

Spinoff year#spinoff size -0.0349**

(0.0158)

Spinoff year plus 1 0.00999

(0.0724)

Spinoff year plus 1#spinoff size -0.00123

(0.0163) Firm size 0.635*** 0.654*** (0.131) (0.127) Return on assets -0.151 -0.153 (0.0951) (0.0957) Leverage -0.0412 -0.0498 (0.114) (0.114) MTB -0.0370 -0.0342 (0.146) (0.147) RD expenses -0.145 -0.147 (0.0903) (0.0907)

Industry FE Yes Yes

Year FE Yes Yes

Constant 0.955** 0.872**

(0.373) (0.381)

Observations 325 325

R-squared 0.420 0.415

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 a) This model has standardized regression coefficients. c) This model is cluster by company. d) This model is a result of an OLS regression. a) All variables are winsorized b) the variables are the following: CSR-score: The ESG-score from Thomson Reuters ASSET4. Spinoff year: A dummy variable that is equal to 1 for the year that the spinoff occurs. Spinoff year plus 1: A dummy variable that is equal to 1 for the year after the spinoff occurs. Firm size: Logarithm of total assets (measured each year). Return on assets (ROA): Net income over total assets (measured each year). Leverage: One minus the ratio of shareholder's equity over total assets (measured each year). Market-to-book ratio (MTB): Market value of equity over book value of equity calculated at fiscal year-end (measured each year). RD expenses: Research and development expenses over sales (measured each year). Focusing spinoff: An indicator variable equal to 1 if the upcoming spinoff is focus-increasing (the first 2 digits of the SIC-code differs between the parent company and the spun off company). Spinoff size: Total assets of the spun off over the total assets of the parent company

29

Table 6: Regression analysis

(1) VARIABLES CSR-score Focusing spinoff -0.206 (0.166) Spinoff year -0.161 (0.109)

Focusing spinoff#spinoff year 0.0446

(0.179) Firm size 0.622*** (0.122) Return on assets -0.115 (0.0740) Leverage -0.0818 (0.108) MTB -0.0186 (0.137) RD expenses -0.101 (0.0728) Constant 0.856** (0.356) Industry FE Yes Year FE Yes Observations 369 R-squared 0.400

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 a) This model has standardized regression coefficients. c) This model is cluster by company. d) This model is a result of an OLS regression. a) All variables are winsorized b) the variables are the following: CSR-score: The ESG-score from Thomson Reuters ASSET4. Spinoff year: A dummy variable that is equal to 1 for the year that the spinoff occurs. Firm size: Logarithm of total assets (measured each year). Return on assets (ROA): Net income over total assets (measured each year). Leverage: One minus the ratio of shareholder's equity over total assets (measured each year). Market-to-book ratio (MTB): Market value of equity over book value of equity calculated at fiscal year-end (measured each year). RD expenses: Research and development expenses over sales (measured each year). Focusing spinoff: An indicator variable equal to 1 if the upcoming spinoff is focus-increasing (the first 2 digits of the SIC-code differs between the parent company and the spun off company). Spinoff size: Total assets of the spun off over the total assets of the parent company