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Learning about Internal Capital Markets from Corporate Spin-offs

  • Robert Gertner

    (University of Chicago and NBER,)

  • Eric Powers

    (University of South Carolina,)

  • David Scharfstein

    (Massachusetts Institute of Technology and NBER)

We examine the investment behavior of firms before and after being spun off from their parent companies. Their investment after the spin-off is significantly more sensitive to measures of investment opportunities (e.g., industry Tobin's "Q"or industry investment) than it is before the spin-off. Spin-offs tend to cut investment in low "Q"industries and increase investment in high "Q"industries. These changes are observed primarily in spin-offs of firms in industries unrelated to the parents' industries and in spin-offs where the stock market reacts favorably to the spin-off announcement. Our findings suggest that spin-offs may improve the allocation of capital. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 6 (December)
Pages: 2479-2506

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:6:p:2479-2506
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