Corporate restructuring, encompassing mergers and acquisitions (M&A) and divestitures (spin-offs and sell-offs), is a significant global phenomenon. While M&A attracts considerable attention, divestitures represent a substantial portion of this activity. Spin-offs, where a business unit is separated into a new, independent company, have seen a marked increase in recent decades, as evidenced by the performance of the Bloomberg U.S. Spin-off Index. This paper focuses on voluntary spin-offs, building upon foundational research from the 1980s. The authors aim to review existing literature, re-examine valuation consequences, and, for the first time, quantify the total monetary value generated by spin-offs.

Research on spin-offs, initiated in the early 1980s with seminal papers by Hite and Owers (1983) and Schipper and Smith (1983), has grown significantly. Early studies focused on forced divestitures, but the focus shifted to voluntary spin-offs. Research explores various aspects, including the valuation impact on divesting firms, the intriguing positive ex-dividend day price impact, and wealth transfers between stockholders and bondholders. Studies have compared spin-offs to sell-offs, analyzing factors like industrial focus, information asymmetry, and debt levels. The literature suggests that spin-offs frequently lead to value creation for both the parent and subsidiary companies, exceeding the gains typically seen in whole-firm acquisitions. Explanations for this value creation include addressing diseconomies of scale, resolving legal issues, separating troubled units, and potentially creating attractive acquisition targets. Previous research has also considered the roles of governance mechanisms, market optimism, and the impact of underperforming assets on announcement effects.

The study uses data from the CRSP database, examining 249 spin-off transactions by US public companies from 2007 to 2017. The authors identify the initial press date for each transaction through an extensive review of financial news sources. They employ an event-time methodology using the market model to calculate excess returns (prediction errors) for each security. Cumulative prediction errors (CPE) are calculated over various intervals, including a standard (-1, +1) window around the announcement date and the entire period from press announcement to dividend payment. The Dodd and Warner (1983) test statistic is used, standardizing prediction errors by their estimated standard deviations. The methodology also accounts for the ex-dividend date, a unique aspect of spin-offs, and considers the potential impact of "when-issued" trading. A key innovation is the calculation of the total monetary value created by spin-offs during the study period by applying cumulative abnormal returns to the market capitalization before the announcement.

The study confirms previous findings regarding the positive valuation effects of spin-offs. A cumulative abnormal return (CAR) of approximately 3% is observed around the announcement date (-1, +1), consistent with earlier research. A significant positive abnormal return is also detected on the ex-dividend date. The authors observe a statistically significant positive CAR (0.65%) around the formal dividend declaration date, suggesting that this event conveys information to the market. The average CAR over the entire period (press date to dividend payment) is 4.1%, increasing to 5.01% after excluding a small number of firms with unusually large negative returns due to firm-specific events unrelated to the spin-off process. Most significantly, the study estimates that the total monetary value created by these 249 spin-offs between 2007 and 2017 is approximately $95.17 billion, with an average of $423 million per firm. The analysis notes the presence of an ex-dividend day effect that remains significant even considering improvements in market microstructure, suggesting factors beyond transaction costs are at play.

The findings strongly support the conclusion that spin-offs are a value-creating strategy for firms. The consistent observation of positive abnormal returns across different time periods and methodologies highlights the robustness of this result. The quantification of the monetary value created, nearly $100 billion over a decade, demonstrates the significant economic impact of spin-offs. The persistent ex-dividend day effect remains an area for further exploration, with potential explanations relating to market microstructure and investor preferences. The results contrast with the changing dynamics of whole-firm acquisitions, where value creation has diminished due to increased competition and the winner's curse. The single-firm nature of spin-offs and the enhanced investment opportunity set they create for investors are likely contributing factors to their sustained value creation potential.

This paper provides a comprehensive review of spin-off research, extending from foundational works to current findings. The authors confirm the persistent value-creating nature of spin-offs and, critically, quantify the substantial economic materiality of this value creation. Future research could explore the ex-dividend day effect in greater detail, investigate the role of "when-issued" trading, and examine the long-term performance of spun-off firms. Further studies could also analyze the impact of different spin-off characteristics (size, industry, etc.) on value creation.

The study is limited to voluntary spin-offs of US public companies between 2007 and 2017. The sample excludes firms with insufficient return data, which might introduce some selection bias. While the authors attempt to control for firm-specific events that may have impacted the returns, it is possible some unobserved factors influence the results. The focus on US firms limits the generalizability of the findings to other markets.