Spinoffs and Firm Policy

Abstract

I investigate the nature of reconstructing by examining the changes in firm policies around spinoff. Because the pre-spinoff contract structure is more suitable for larger divisions of firms, separated units experience relatively large changes in contracts following spinoffs. Compared to the post-spinoff parent firms, separated units have lower tendency to pay dividends, lower ownership by CEOs, higher fraction of outside directors, smaller board, younger board members, higher block ownerships, and higher incentive payment. There are significant changes in the firm policies in both high q and low q units, however the market response is more positive for units with higher growth opportunities.