Shedding Light on Corporate Spinoff Operating Performance: A European Perspective Fredrik Mats Bo Henriksson (s124099) Alma Holst (s124615) Master’s Thesis M.Sc. International Business and M.Sc. Finance & Strategic Management Copenhagen Business School June 2020 Keywords: Corporate spinoffs, operating performance, agency theory, corporate focus, correction-of-a- mistake, dual directorship Supervisor: Professor Kristina Dahlin Number of pages: 104 physical pages and 98 pages by substance Characters (Inc. spaces): 223.091 Date of Submission: 15h of June 2020 Abstract ABSTRACT A large body of evidence has documented positive stock-price announcement and long-term effects of corporate spinoffs. More controversial and substantially less investigated is the issue whether spinoffs produce ex post efficiency gains. Applying agency theory, our study of 102 spinoffs from 19 European countries occurring between 2002 and 2016 examines whether spinoffs generate actual improvements in operating performance of both the continuing parent, its spun-off child firm, and the combined parent- child portfolio. We test three hypotheses from previous market-based spinoff literature, the corporate focus hypothesis, the correction-of-a-mistake hypothesis, and the dual directorship hypothesis, to examine under which circumstances such improvements are maximised. Tracking changes in unadjusted and three adjusted measures of Return on Assets (ROA), we document no evidence of substantial improvements in the operating performance of the average parent-child portfolio, with the average child firm being associated with deterioration in operating performance in the first year following the spinoff. We find that only spinoffs of subsidiaries that operates in the same industry as their parents (non-focus- increasing) are the transactions that create significant average improvements in operating efficiency post spinoff, and that these gains are generated only at the child firm level and not within parent firms. Our study further reveals that the ‘origin’ of the spun-off child firm (formerly acquired or internally developed) has insignificant impact on the operating performance of the average parent, child firm, and parent-child portfolio. Furthermore, we find that the presence of one ‘dual director’, defined as board members from the parent firm simultaneously serving the board of the child firm, is associated with significant improvements in operating performance, and that this benefited the parents but not child firms. Finally, we document that the presence of multiple dual directors was detrimental for the average parent and the average child firm that is related to its former parent, but beneficial for the average child firm that is unrelated to its former parent. Page 1 of 122 Acknowledgements ACKNOWLEDGEMENTS We would like to first extend our sincerest gratitude to our supervisor, Kristina Dahlin, Professor with special responsibilities at CBS Department of Strategy and Innovation, for her valuable guidance and enthusiasm throughout the process of our study. We also want to take the opportunity to thank our family and friends for their unconditional support throughout our academic journeys, that with this thesis has come to an end. Page 2 of 122 Table of contents TABLE OF CONTENTS ABSTRACT ............................................................................................................................................................1 ACKNOWLEDGEMENTS ...................................................................................................................................2 TABLE OF CONTENTS .......................................................................................................................................3 LIST OF TABLES AND FIGURES .....................................................................................................................6 TABLE OF KEY TERMINOLOGY ....................................................................................................................7 1 INTRODUCTION ..........................................................................................................................................8 2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT .......................................................13 2.1 AGENCY THEORY ...................................................................................................................................13 2.2 CORPORATE FOCUS HYPOTHESIS ...........................................................................................................15 2.3 CORRECTION-OF-A-MISTAKE HYPOTHESIS ............................................................................................18 2.4 DUAL DIRECTORS HYPOTHESIS ..............................................................................................................20 2.4.1 Modest oversight by parent firms .......................................................................................................23 2.4.2 Disproportionate oversight by parent firms .......................................................................................24 2.5 SUMMARY OF HYPOTHESES ....................................................................................................................26 3 SAMPLE CONSTRUCTION, DATA COLLECTION AND CHARACTERISTICS ...........................27 3.1 SAMPLE CONSTRUCTION ........................................................................................................................27 3.2 DATA COLLECTION .................................................................................................................................30 3.3 SAMPLE CHARACTERISTICS ....................................................................................................................31 3.3.1 Distribution of spinoffs by year ..........................................................................................................31 3.3.2 Distribution of sample firms by country .............................................................................................32 3.3.3 Distribution of sample firms by sector and industry ..........................................................................34 3.3.4 Distribution by relative size of spinoff ................................................................................................37 4 VARIABLES .................................................................................................................................................38 4.1 MEASURING OPERATING PERFORMANCE ................................................................................................38 4.1.1 Abnormal operating performance ......................................................................................................39 4.1.2 Computing adjusted measures of abnormal operating performance .................................................41 4.2 EXPLANATORY VARIABLES ....................................................................................................................44 4.2.1 Classification of Corporate Focus .....................................................................................................44 4.2.2 Classification of Origin (Correction-of-a-mistake) ............................................................................46 4.2.3 Classification of Dual Directorship....................................................................................................46 5 STATISTICAL PROCEDURE ...................................................................................................................50 5.1 OVERVIEW OF TEST STATISTICS AND ASSUMPTIONS ..............................................................................50 5.2 PARAMETRIC TEST ..................................................................................................................................54 5.2.1 One sample t-test ................................................................................................................................54 Page 3 of 122 Table of contents 5.2.2 Independent Two-Sample t-test...........................................................................................................55 5.2.3 One-Way ANOVA ...............................................................................................................................56 5.3 NON-PARAMETRIC TEST..........................................................................................................................58 5.3.1 Wilcoxon Signed-Rank test .................................................................................................................58 5.3.2 Mann-Whitney U test ..........................................................................................................................58 5.3.3 Kruskal-Wallis test .............................................................................................................................59 6 EMPIRICAL RESULTS ..............................................................................................................................61 6.1 AGENCY THEORY ...................................................................................................................................61 6.1.1 Hypothesis 1a .....................................................................................................................................63 6.1.2 Hypothesis 1b .....................................................................................................................................63