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Corporate Spinoffs- A Risk and Return Perspective

by Lundh, Hampus

Abstract (Summary)
Spinoffs are an increasing phenomenon on the Swedish stock market. In this report one can read about factors that trigger spinoffs as well as about the short and medium term risk and return that spinoffs yield. I have observed 17 pre-spinoff companies that become 34 post-spinoff companies which continued to be traded on the stock market.For the purpose of the investigation I use time-series regression, and my model is the sin-gle-factor market model. I use this model to estimate the beta and the firm specific factor. Supporting theories are: efficiency, portfolio theory, valuation method and asymmetry all those topics are central parts in a spinoff.From my research I can not prove that spinoffs increase shareholders wealth. That means that the new units created through a spinoff are not more worth than the old corporation as such the new units do not outperform the old conglomerate structures expected return. However, the new units beta is not equal the old conglomerate structures beta, and this may due to change in capital structure. The weighted beta increase in half of the times, as such, it suggests a higher level of debt financing.By comparing the spinoff company and the parent company in the post-spinoff scenario it can be concluded that the company who is performing the best is also the riskier alternative and the spinoff performs better than the parent company in eleven out of seventeen times. There is also a correlation between risk and return - when higher return is observed it also brings higher risk, and it holds true in all samples except one.Further, at group level the spinoff group performs better than the market return and the spinoff group performs on average better than the parent group. Thus, if an outside inves-tor is to invest in either a spinoff company or a parent company one should buy the spinoff company at preferred weight according to the investors risk preferences.
Bibliographical Information:

Advisor:

School:Högskolan i Jönköping

School Location:Sweden

Source Type:Master's Thesis

Keywords:corporate spinoffs spinouts deconsolidation reconstructing specialization systematic risk return

ISBN:

Date of Publication:06/13/2007

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