The Motives Of Corporate Spinoffs: Evidence From Ex-Ante Misvaluation

This study examines whether ex-ante misvaluation can explain motive differences between focus-increasing and non-focus-increasing spinoffs. In this study, a spinoff is defined as focus-increasing if the parent firm and the spun-off subsidiary operate in different industries. Otherwise, a spinoff is classified as a non-focusincreasing spinoff. The empirical results show that firms are more likely to conduct non-focus-increasing (focus-increasing) spinoffs if their valuation errors are larger (smaller). Also, short-term firm-specific overvaluation and overvalued long-run growth opportunities increase the probability of conducting a nonfocus-increasing spinoff. The probability of conducting a focus-increasing spinoff increases when long-run growth opportunities are undervalued. The results suggest that motives underlying non-focus-increasing spinoffs are likely related to the exploitation of investors, whereas the motives underlying focus-increasing spinoffs are more likely beneficial to investors. An examination of investor reactions to spinoff announcements suggests that investors can see through the motives underlying corporate spinoffs