Better off Without You? A Study on Capital Allocation Efficiency of Spin-offs in the United States

Sammanfattning: Through this paper we examine the internal capital allocation efficiency of spun-off entities, before and after completing spin-offs from their respective parent companies. The study involves a collection of 78 public, corporate spin-offs in the US during the time period 2005-2016. Although indicating that the firms' sensitivity to investment opportunities, measured by industry median Tobin's Q, increases, we find no significant evidence in our thesis supporting that spun-off entities from diversified firms improve their capital allocation efficiency post spin-offs. However, statistically significant evidence is obtained specifically supporting that large spun-off entities and single-segment spun-off entities operating in industries experiencing a low volatility in industry median Q, indeed improve their capital allocation efficiency post spin-offs. Conclusively, our findings indicate that the undertaking of spin-offs may have a positive effect on the internal capital allocation of the spun-off entities, being larger for entities with specific characteristics.