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The effects of corporate spin-offs on productivity

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  • Chemmanur, Thomas J.
  • Krishnan, Karthik
  • Nandy, Debarshi K.

Abstract

Using a unique sample of plant level data from the Longitudinal Research Database of the U.S. Census Bureau, which enables us to correctly identify the parent and spun-off entities prior to spin-offs, we establish that efficiency improves following spin-offs. A spin-off refers to the separation of the management of some assets of a firm into a separate entity (which we term as the spun-off entity or subsidiary). We investigate the underlying mechanisms and the real effects of spin-offs after correcting for potential endogenous selection using treatment effect estimators and propensity score matching in our analysis. We identify how (the precise channel and mechanism), where (parent or subsidiary), and when (the dynamic pattern) efficiency improvements arise following spin-offs. We show that spin-offs increase total factor productivity (TFP) and that such productivity improvements are long-lived. This post spin-off productivity improvement can be attributed to cost savings but not to higher sales. Further, such improvements arise primarily in plants remaining with the parent. However, contrary to speculation in the previous literature, we show that plants that are spun-off do not underperform parent plants prior to the spin-off. We identify acquisitions following spin-offs and find that while productivity improvements occur immediately after the spin-off in non-acquired plants, they start only after being taken over by another firm in acquired plants. Finally, we show that unrelated spun-off entities show greater improvements in productivity compared to related spun-off entities.

Suggested Citation

  • Chemmanur, Thomas J. & Krishnan, Karthik & Nandy, Debarshi K., 2014. "The effects of corporate spin-offs on productivity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 72-98.
  • Handle: RePEc:eee:corfin:v:27:y:2014:i:c:p:72-98
    DOI: 10.1016/j.jcorpfin.2014.04.005
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    References listed on IDEAS

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    Cited by:

    1. Feng, Yi & Nandy, Debarshi K. & Tian, Yisong S., 2015. "Executive compensation and the corporate spin-off decision," Journal of Economics and Business, Elsevier, vol. 77(C), pages 94-117.
    2. Stanislava Todorova, 2016. "Transformation of commercial companies: global and national aspects," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 75-96.
    3. Chemmanur, Thomas J. & He, Shan, 2016. "Institutional trading, information production, and corporate spin-offs," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 54-76.

    More about this item

    Keywords

    Spin-offs; Restructuring; Endogenous selection; Total factor productivity (TFP);

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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