Corporate spin-offs and stock performance: a comparative study of pure and composite schemes

Abstract

Purpose

Several studies have examined the relationship between spin-off announcements and stock performance. However, a comparison of the announcement effect of different schemes of spin-offs remains relatively underexplored in the literature. This study aims to find the differential impact of pure scheme and composite schemes of spin-offs on parent company stock performance. A pure scheme includes only the separation of business into independent companies, while a composite scheme includes a simultaneous merger of one of the companies with another company along with separation.

Design/methodology/approach

A total of 109 pure and 51 composite spin-off announcements made by Indian listed companies from 2010 to 2023 are examined using event study methodology. The cross-sectional t-test is used to measure the significance of abnormal returns. The t-test for two sample means (right-tailed) is incorporated to test the significance of variations in the stock returns of pure and composite schemes of spin-off announcements. Cross-sectional regression is also done to evaluate the impact of the type of scheme on the spin-off return.

Findings

The study found a cumulative average abnormal return of −1.06% for the pure spin-off and 8.27% for the composite spin-off over a 41-day event window. The univariate analysis revealed that the composite scheme generates a significantly higher cumulative average abnormal return than the pure scheme. Regression analysis also confirmed that the composite scheme significantly positively impacts the stock return. It can be concluded that investors favour the composite scheme, expecting that it will deliver a better strategic fit and generate synergy.

Originality/value

This paper makes a valuable contribution to the existing literature on corporate spin-offs. The study by analysing and comparing how the spin-off and merger combination differently affects the stock performance, helps the investor who wants to capitalize on the market imperfections and the managers to make complex business decisions.

Citation

Bhat, M. and Shiralashetti, A.S. (2024), "Corporate spin-offs and stock performance: a comparative study of pure and composite schemes", Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MF-05-2024-0398