Spinoffs, Ex Ante

Cusatis, Miles and Woolridge (1993) report large positive excess stock returns following spinoffs for the parent firms that undertake the spinoffs and for the spun off subsidiaries themselves. They examine the period 1965 through 1988 and consider returns for up to 36 months following the spinoff. We investigate whether a trading strategy based on this ex post analysis earns positive excess returns on an ex ante basis using a holdout sample of spinoffs that occurred over the period 1989 through 1995. We find that, at best, such a strategy produced break-even results when compared with a size-and industry-matched firm benchmark. Tests of beat-the-market strategies based on long-run post-event returns are often used to argue against the semi-strong form of the efficient market hypothesis. We do not know whether U.S. stock markets are semi-strong form inefficient, but our results indicate that post-spinoff returns cannot be used to make that argument.