The Effects of Spin‐offs on Corporate Investment and Performance

We examine characteristics of firms involved in spin‐offs and test whether these spin‐offs induce changes in investment incentives and economic performance. We find that firms engaging in spin‐offs are larger, more highly leveraged, and have higher asset turnover and lower real asset growth than their industry rivals. We also find that spin‐offs generate significant increases in real asset growth and cash flow margin on sales for combined firm measures (spun‐off firm plus parent firm). The gains result from increases in real asset growth for parent and spun‐off firms, and improvements in cash flow margin on sales for parents. Our evidence is consistent with models in which spin‐offs create value by improving investment incentives and economic performance.