Spin-Offs. Implications for Corporate Policies

Corporate spin-offs are important corporate restructurings that are associated with significant positive abnormal stock returns at their announcement. Recent research has investigated the sources of these gains. There has been considerable empirical support for theories that argue that excessive diversity of the assets of a large firm gives problems. A spin-off separates diverse units of the firm and results in two companies that have dissimilar assets. This paper explores implications for the organization and optimal corporate policies of these new firms. I argue that because the assets of the two new companies are dissimilar, their optimal corporate policies and internal organization also should be different. The impossibility to implement these dissimilar optimal policies in the original firm likely has aggravated the problems leading to the spin-off.