Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

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2/15/2005
Spin-offs, by Victor Niederhoffer

I have examined about 100 papers on corporate spin-offs in the last day, my conclusions are as follows:

1.This is a fertile field where the results of the original studies are completely outdated and desperately need contemporaneous update, an effort which my good colleagues are working on.

2.The original study by Cusatis, Miles and Woolridge showed that from 1963-1988  returns of 10 percentage points a year better than the averages for the three subsequent years to the announcement. All attempts to replicate this have been failures. Indeed, the best studies I have seen on the subject, by Sebastian Ruta, 2001, shows that from 1990-1999 the spin-offs show returns of about -30 percentage points relative to the market in the period starting six months after announcement and ending four years after announcement.

3.The type of management involved in the spin-off seems to be key as ably analyzed in a study by Wruck and Wruck Restructuring Top Management: Evidence from Corporate Spin-offs. They find that a spin-off does better with a division head and a big honcho from the parent company in the driver's seat after the spin-off but that all spin-offs do worse than their peers.

4.There is substantial evidence that carve-outs, a public sale by a parent and then a spin-off, do worse than the market and the same is true for tracking stock. See The Market Performance of Tracking Stocks by Matthew Billett and Anand Vijh.

5.Another factor that seems to affect the relatively lackluster performance of spin-offs is the degree to which the spin-off was in a separate industry from the parent -- an increase in focus. Thus, Desai and Jain in "Firm Performance and Focus" conclude that from 1975 to 1991 "long run abnormal returns for the focus increasing spin-off are significantly larger than the corresponding abnormal returns for the non focus increasing spin-offs."

6.The book You Can Be a Stock Market Genius by Joel Greenblatt has some excellent intuitive ideas, including the hypothetical influence of better incentives on excellent spin-off performance after the spin-off, but it seems good that Greenblatt got out of the hedge fund business in 1995 as his strategy does not appear to be working.

7.There appear to be about 15 spin-offs a year that make it to all the samples involving CRSP and Compustat data with security research data being a key.

8. I have a complete contemporaneous up-to-date sample which will be subjected to counting and refutability and prospectiveness.

2/15/2005
More on Spin-offs, by Victor Niederhoffer

"Spin-offs that Expropriate Wealth from Bondholders" by Maxwell and Rao is at once an example of the value and the worthlessness of academic research. The worthlessness is apparent in that they are able after going through extensive data collection to find a complete enumeration of 72 companies that fit their criteria from 1974 to 1997. Thus, there were able to come up with only three a year and this includes apparently all of Nasdaq as well as NYSE and AMEX. Obviously there are so many small companies involved, there are so many missing data, there are so many divergences in the companies that have full data on bonds, and the data are so out of date, that all conclusions are completely worthless and behind the form.

Yet the ideas that the professors consider are very suggestive, i.e. that there is a transfer of wealth to stockholders from bondholders in spin-offs, that spin-offs in two separate industries create more wealth for stockholders, that the co-variation of returns between the two companies is an important variable in determining how much the separate stakeholders benefit. That the abnormal returns are concentrated around the announcement, that the amount of collateral involved in the deal determines how much bondholders lose, that the degree of of the financial risk influences the returns to bondholders with low grade companies showing bond losses greater than high grade companies.

All in all, the paper is a useful descriptive exercise in qualitative analysis, like a critique of a novel in a typical college English class. But the paper points out the problems of such studies. The data collection is so hard , that it's likely a fertile field for abnormal returns. However, the timeliness of the analysis and the wholesale retrospective elimination of companies that one would be unable to eliminate a priori makes any conclusion complete behind the form.