Spin‐off performance: A case of overstated expectations?

Abstract While the impact of divestitures on parent firms has been extensively studied, little attention has been given to the performance of the divested units. Previous research has found that spin‐offs and sell‐offs were associated with significant positive cumulative abnormal returns. However, these studies have not identified whether these benefits were expected to accrue to the divesting firm, the divested unit, or both. Specifically, this study examined the performance as autonomous firms of a sample of 51 voluntary spin‐offs by nonfinancial firms across a 6‐year period. Three accounting and financial market measures were tracked from 2 years prior to divestiture through the first three years of independence. No change in pre‐ and post‐spin‐off performances was observed except for the decline in profitability return on assets (ROA). The effect of relatedness between the parent company and the spinoff was also examined. Divested units which were unrelated to their parents prior to spinoff reported deterioration in performance. Implications for divestiture and restructuring programs are developed.