Date of Award

Winter 2007

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Program/Concentration

Business Administration-Finance

Committee Director

Kenneth Yung

Committee Member

Mohammad Najand

Committee Member

David Selover

Abstract

This dissertation investigates two possible sources that contribute to the gains of corporate spin-offs. In the first essay, I investigate the relation between the value created by corporate spin-offs and the misvaluations of the parent firms and their spun-off divisions. I argue that spin-offs could create value even though the efficiency of the firm remains unchanged. Corporate spin-offs could be driven by the desire to correct the undervaluation of the parent firm or the spun-off unit. Thus, the gains of spin-offs should be highly correlated with the degree of misvaluation. By examining a 263 corporate spinoffs sample in the period of 1980-2006, I find that parent firms are relatively undervalued before the spin-offs, and the undervaluation problem subsides after the divestiture. Moreover, the degree of undervaluation of parents is positively correlated with the announcement abnormal returns. Surprisingly, I find that the spun-off divisions, on average, are highly overvalued before the spin-offs, and such overvaluation turned into undervaluation after those divisions become independent entities. Overall, the findings indicate that the gains of spin-offs are primarily attributed to the undervaluation correction of parent firms, rather than the value created by spun-off divisions.

In the second essay, I investigate whether managers "manage" earnings before corporate spin-offs. I argue that managers have incentives to manipulate earnings due to either managerial opportunism or managerial optimism. Either motivation could result in a positive correlation between the level of abnormal accruals and the announcement abnormal returns. With a 240 spin-off sample from 1980-2006, I find that spin-offs firms aggressively manage earnings prior to the announcements. The results show that the level of abnormal accruals of spin-off parents increases significantly prior to the spin-off and becomes insignificant after the spin-off is completed. I also find that pre-spin-off abnormal accruals have predictive power of the announcement returns. The finding indicates that significant, positive spin-off announcement returns are correlated to the pre-spin-off earnings management. In addition, I find a positive relation between the level of earnings management and the long-term returns of spin-offs parents, which is consistent with the signaling hypothesis prediction. However, the predictive power is not statistically significant. A number of explanations regarding the findings are discussed.

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DOI

10.25777/3pdq-9e58

ISBN

9780549382270

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