In a spin-off, the parent divides the assets of the firm and chooses the capital structure for the new, stand-alone entity. I therefore use this sample to investigate how firms determine their capital structure. I find that the subsidiary has a leverage ratio lower than the parent's but similar to that of a comparable non-spin-off firm. Growth opportunities are the primary determinant of the subsidiary's leverage. Profitability has no impact on leverage choice. These results support the predictions of the trade-off theory of capital structure and provide insight into why previous studies find a negative relation between leverage and profitability.
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Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 77 (2004) Issue (Month): 1 (January) Pages: 9-44 Download reference. The following formats are available: HTML
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