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How is Value Created in Spin-Offs? A Look Inside the Black Box

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  • Debarshi Nandy
  • Thomas Chemmanur

Abstract

Using a unique sample of plant level data from the Longitudinal Research Database (LRD), we identify (for the first time in the literature), how (the precise channel and mechanism), where (parent or subsidiary), and when (the dynamic pattern) performance improvements arise following corporate spinoffs. We identify the source of value improvements in spin-offs by comparing the magnitude of post-spinoff changes in the wages, employment, materials costs, rental and administrative expenses, sales, and capital expenditures in the plants belonging to firms undergoing spin-offs relative to the magnitude of such changes in a control group of plants belonging to firms not undergoing spin-offs. We show that the total factor productivity (TFP) of plants belonging to spin-off firms (parent or spun-off subsidiary) increase, on average, following the spin-off. This increase in overall productivity begins immediately, starting with the first year following the spin-off, and continuing in the years thereafter. This performance improvement can be attributed to a decrease in workers' wages, employment at the plant, decrease in the cost of materials purchased, as well as a decrease in rental and office expenditures, but not from improved product market performance by these plants. Further, such productivity improvements arise primarily in plants that remain with the parent; plants belonging to the spun-off subsidiary do not experience such productivity increases. However, contrary to speculation in the previous literature, plants that are spun-off do not underperform parent plants prior to the spin-off. Finally, in our split-sample study of plants that were acquired subsequent to the spin-off and those that were not, we find that productivity increases for both groups of plants: while such productivity increases start immediately after the spin-off for the nonacquired plants, for the acquired plants they occur only after being taken over by a better management team.

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File URL: ftp://ftp2.census.gov/ces/wp/2005/CES-WP-05-09.pdf
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 05-09.

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Length: 38 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:cen:wpaper:05-09

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  1. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
  2. Sendhil Mullainathan & Marianne Bertrand, 1998. "Is there Discretion in Wage Setting? A Test Using Takeover Legislation," Working papers 98-19, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Robert H McGuckin & Sang V Nguyen, 2000. "The Impact of Ownership Changes: A View from Labor Markets," Working Papers 00-02, Center for Economic Studies, U.S. Census Bureau.
  4. Antoinette Schoar, 2002. "Effects of Corporate Diversification on Productivity," Journal of Finance, American Finance Association, vol. 57(6), pages 2379-2403, December.
  5. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  6. Miles, James A & Rosenfeld, James D, 1983. " The Effect of Voluntary Spin-Off Announcements on Shareholder Wealth," Journal of Finance, American Finance Association, vol. 38(5), pages 1597-1606, December.
  7. Charles Brown & James L. Medoff, 1988. "The Impact of Firm Acquisitions on Labor," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 9-32 National Bureau of Economic Research, Inc.
  8. Schipper, Katherine & Smith, Abbie, 1983. "Effects of recontracting on shareholder wealth : The case of voluntary spin-offs," Journal of Financial Economics, Elsevier, vol. 12(4), pages 437-467, December.
  9. John, Teresa A., 1993. "Optimality of Spin-Offs and Allocation of Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 139-160, March.
  10. Sang V Nguyen, 1998. "The Manufacturing Plant Ownership Change Database: Its Construction And Usefulness," Working Papers 98-16, Center for Economic Studies, U.S. Census Bureau.
  11. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
  12. Chemmanur, Thomas J. & Yan, An, 2004. "A theory of corporate spin-offs," Journal of Financial Economics, Elsevier, vol. 72(2), pages 259-290, May.
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Cited by:
  1. Oana Hirakawa & Marc-Andreas Muendler & James E. Rauch, 2010. "Employee Spinoffs and Other Entrants: Stylized Facts from Brazil," NBER Working Papers 15638, National Bureau of Economic Research, Inc.

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