Firm performance and focus: long-run stock market performance following spinoffs

Abstract

We examine whether an increase in focus is an explanation for the stock market gains associated with spinoffs. For a sample of 155 spinoffs between the years 1975 and 1991, we find that the announcement period as well the long-run abnormal returns for the focus-increasing spinoffs are significantly larger than the corresponding abnormal returns for the non-focus-increasing spinoffs. The results for the change in operating performance are consistent with those for the stock market performance. Cross-sectionally, the stock market performance as well as the operating performance are positively associated with change in focus. An analysis of the non-focus-increasing spinoffs shows that the firms are likely to undertake these spinoffs to separate underperforming subsidiaries from the parents.