1、Blockownershipincreasesmorewhentheinheritedblockownershipissmaller,whenthespin-offs are smaller, have poorer performance and fewer growth opportunities relative to theparent, and when they operate in industries that are less related to the parents industries. Theresults suggest that block ownership
2、changes in response to the monitoring needs of spin-offs.of thetakescompany. However, the assets and operations of spin-offs are usually quite different from those of their parents. This creates anJournal of Corporate Finance 14 (2008) 596613Contents lists available at ScienceDirectJournal of Corpor
3、ate Financejournal homepage: experimental setting for testing hypotheses on how changes in rm characteristics and thus monitoring requirementsinuence ownership structure, and the consequences of changes in ownership structure for rm performance and survival.Mostpreviousanalysisofownershipstructurei
4、sofmatureorlargerms.Theownershipstructureofsuchrmschangesslowly(see for example, Barclay and Holderness,1989; Denis and Sarin,1999; Zhou, 2001) thereby impeding direct analyses of its causesand consequences (Zhou,2001; Coreand Larcker, 2002). Unlike maturerms, spin-offs arelikely toexperience signic
5、ant changesin ownership structure. Specically, if monitoring requirements inuence ownership structure, the ownership structure inheritedbyspin-offs will change in response to changes in monitoring needs arising from differences betweenparent companies and spin-parent company before becoming independ
6、entbecause the issuance of spin-off sharesoffs in attributes such as rm size, risk, growthThis paper is part of my dissertation studies at themany valuable insights. I gratefully acknowledge theThomas andespecially, Kenneth Lehn. Ialso acknowledgeand at workshops at the University of Pittsburgh, Sou
7、thern Tel.: +1785 532 6031; fax: +1785 532 6822.E-mail address: spatroksu.edu.0929-1199/$ see front matter 2008 Elsevier B.V.doi:10.1016/j.jcorpn.2008.08.009legal entities. At inception spin-offs inherit the ownership structure of the parentplace in the form of a pro-rata stock distribution to the s
8、tockholders of the parent1. IntroductionThis paper examines the evolutionThis interpretation is supported by the positive association between changes in blockownership and subsequent rm performance and survival. 2008 Elsevier B.V. All rights reserved.ownership structure of corporate spin-offs i.e. r
9、ms that existed as divisions of aJEL classication:G30G32G34Keywords:Ownership structureBlock ownershipSpin-offsEndogeneityGrowth optionsMonitoringFirm performanceSurvivalComparison with size and industry-matched rms shows that this is not due to secular trends.The evolution of ownership structure of
10、 corporate spin-offsSukesh PatroCollege of Business Administration, Kansas State University, 10D Calvin Hall, Manhattan, KS 66502, United Statesarticle info abstractArticle history:Received 12 March 2007Revised 28 August 2008Accepted 31 August 2008Available online 6 September 2008Spin-offs inherit t
11、he ownership structure of their parents. The change from the monitoringrequirements of the parent to those of an often smaller and higher risk rm constitutes a shockto this inherited ownership structure. This paper examines how block ownership changes inresponse to this shock and the performance and
12、 survival consequences of these changes. Blockownership increases from an average inherited level of 20.34% to 27.35% in three years.options and industry mix. For example, consider the ownership structure of CornKatz Graduate School of Business, University of Pittsburgh. I thank the Editor and an an
13、onymous referee forsupport of my committee members Gershon Mandelker, Jean Francois Richard, Kuldeep Shastri, Shawnthe helpand supportof KyongheeKim, Laxmikant Shukla, participants at the FMA Annual Meeting2006Illinois University and Kansas State University. I am responsible for remaining errors.All
14、 rights reserved.,597S. Patro / Journal of Corporate Finance 14 (2008) 596613Products, the corn-rening division contributing 20% of rm sales, spun off by parent Bestfoods, a diversied packaged-foodscompany. Bestfoods had no block holderlisted in the proxy statements prior tothe spin-off or in the su
15、bsequent years. In contrast,initsrstproxystatement,CornProductshadoneblockholderholding8%of theshares.Totalblockholdingsthenincreasedto25%in year 2, decreased to 17% in year 3, 12% in year 4 and nally increased to 22% in year 5.Using a sample of 117 spin-offs from 1981 through 2000, I document chang
16、es in block ownership (the total holdings of ownerswho each hold at least ve percent of the voting shares) and test predictions regarding their determinants, and performance andsurvival consequences. The salient ndings are below.Regarding the changes in block ownership: In the three years after ince
17、ption the block ownership of spin-offs increases from a mean inherited level of 20.34% to a mean of27.35%. The increase in block ownership is mainly from outside block holdings i.e. where the benecial owner is unafliated tothe management of the rm. By contrast, a sample of mature matching rms chosen
18、 on the basis of size and industry shows insignicant changes in blockownership suggesting that ownership changes in spin-offs are not due to industry or secular trends.Regarding the determinants of changes in block ownership: The changes in block ownership are systematically related to changes in mo
19、nitoring needs captured by the industry relatednessof spin-offs and parents, and by their differences in size, performance and growth opportunities. A signicant negativeassociation between the inherited block ownership and subsequent changes in block ownership also supports the monitoring-needs argu
20、ment. Reecting a greater need for incremental monitoring, spin-offs with lower inherited block ownershipexperience larger increases in block ownership.Regarding the survival and performance of spin-offs: The survival of spin-offs is positively related to the changes in block ownership that occur in
21、the rst three years of theirindependent existence. Changes in the stock valuation of spin-offs are similarly positively related to past changes in block ownership. Pair wise differences in the stock valuation of spin-offs and matching rms are positively associated with the correspondingdifferences i
22、n block ownership. In a simultaneous estimation of Q and block ownership, the relation between the market-to-book ratio and block ownership ofspin-offs becomes less signicant over time and more similar to the corresponding relation in the sample of matching rms.Overall, the results show that changes
23、 in block ownership occur in response to changes in monitoring needs and are positivelyassociated with enhancements in the stock valuations of spin-offs and the probability of their survival. Thus the results help toexplicitly demonstrate the adaptive nature and value relevance of the block ownershi
24、p of rms awidely prevalent feature in UScorporations that is also often used to examine corporate nance and governance issues in the academic literature (Dlugosz et al.,2006).The experimental setting employed in this paper helps to alleviate problems arising from the endogenous formation ofownership
25、 structure (Demsetz and Villalonga, 2001). However, such problems canpersist if the parents decision to spin-off a unitis an outcome of its existing block ownership. To address these concerns I examine press articles relating to the motivation for thespin-off deal. Detailed examinations reveal no ev
26、idence that the parents ownership structure or the sub-optimality thereof is amotivation for the spin-off transaction. Consistent with this lack of evidence, examination of the parent rms block ownershipreveals insignicant changes subsequent to the spin-off. Further, what changes occur in block owne
27、rship show no systematicassociation with changes in the monitoring needs of the parent that arise due to the spin-off. These results provide empiricalsupportfortheargumentthatthespin-offtransactionisnotendogenoustotheownershipstructureoftheparentatthetimeofthespin-off.The rest of this paper is organ
28、ized as follows. In the next section I discuss the choice of spin-offs for a study of ownershipstructure and develop hypotheses. Section 3 details sample formation and present descriptive statistics. Section 4 documentschanges in the ownershipstructure of the spin-offsand comparesthem tothoseof the
29、matching maturerms.Section 5 examinesthe determinants of changes in block ownership and relates the changes to rm performance and survival. Section 6 tests thepotential endogeneity of the spin-off decision and reports robustness checks. Section 7 concludes.2. Spin-offs and ownership structure2.1. Us
30、ing spin-offs to study changes in ownership structureMuchof theempiricalliteratureonownershipstructure examinesthe determinantsof thelevelof different typesof ownership(managerial, block, institutional, etc.) and their relation torm performance in a cross-sectionor panel ofrms(see forexample Demsetz
31、 and Lehn, 1985; Agrawal and Knoeber, 1996; Cho, 1998; Denis and Sarin, 1999; Himmelberg et al., 1999; Demsetz andVillalonga, 2001). Studies of changes in ownership structure around restructuring events are relatively rare. Gilson (1990) studieschangesintheblockownershipofrmsthatdefaultontheirdebtob
32、ligations.Parrinoetal.(2003)examinechangesininstitutionalownership around forced CEO turnover. Kole and Lehn (1999) document the evolution of inside and block ownership in the airlineindustry around its deregulation. Wruck (1989) and Barclay et al. (2007) examine changes in block ownership brought a
33、bout byprivate placements of equity. Franks et al. (in press) study the evolution of ownership structure in a small sample of UK rmsincorporated in the early 1900s.In a study related to spin-offs, Abarbanell et al. (2003) examine changes in the institutional ownership of spin-offs and parentrms arou
34、nd the announcement and effective dates of the spin-off transaction. Different from this paper, their motivation is toexamine institutional investor preferences and the impact of institutional trading on stock returns around the distribution.A keyaspectof ownership structure that discourages studies
35、 of its changesis that it usuallychanges slowly over time. Core andLarcker (2002) argue that the slow pace of change of ownership structure is due to the signicant costs of such changes.1Until themarginal loss due to a departure from the rst-best ownership structure exceeds the marginal cost of chan
36、ging it, the ownershipstructure of a rm need not change. Spin-offs provide a tting example of alterations in the marginal cost-benet trade-off ofchangesin ownershipstructure.Inacorporatespin-off the ownershipstructure of thermisheldconstantwhilethenature of the598 S. Patro / Journal of Corporate Fin
37、ance 14 (2008) 596613rm is fundamentally changed. Compared to their parents, spin-offs usually operate in a different industry, are of a different size,have signicantly different growth opportunities and often require distinctly different management styles. All these factors affectthe monitoring tas
38、k and therefore the marginal cost-benet trade-off of changes in ownership structure.Asecondadvantageofusingspin-offsisthat,unlikeIPOrms,theownershipstructureatinceptionismorelikelyinappropriatefor spin-offs. Jensen and Meckling (1976) argue that as long as public investors are rational, the costs an
39、d benets of the chosenownership structure will be reected in the offer price of a rms IPO and thus internalized by the entrepreneurs who decide theinitialownershipstructure.Thisislesslikelythecaseinspin-offsbecausethechosenownershipstructureforthespin-offissimplythe ownership structure of the parent
40、 on the record date. A related advantage of using spin-offs is that ownership structure israrely cited as a motive for spin-offs. This alleviates potential problems of endogeneity. Specically, if ownership-structure relatedmotivations for spin-offs existed, an examination of changes in ownership str
41、ucture would rst need to account for thosemotivations. However, press articles shows no evidence that this is the case. A priori, therefore, spin-offs present a relatively cleanexperimental setting in terms of the endogeneity of the parents decision to spin-off.2The nal advantage of using spin-offs
42、for a study of ownership structure is that a host of other rm and governancecharacteristics such as rm leverage, board structure and executive compensation contracts are chosen in an efcient manner.These rm and governance characteristics are systematically related to the ownership structure of rms a
43、nd efcient choices ofthese monitoring mechanisms increase the likelihood that changes in ownership structure occur in relative isolation and aretherefore more observable and testable.32.2. Hypotheses2.2.1. Changes in ownership structurePriorempiricalstudiesdocumentanaveragemarketvalueofspin-offsofap
44、proximately30%(KrishnaswamiandSubramaniam,1999) and an average standard deviation of monthly returns of 130% (Abarbanell et al., 2003) relative to their parents. Therelatively smaller size and the benets of greater monitoring of higher risk rms imply greater net benets of an increase in blockownersh
45、ip (Demsetz,1983; Demsetz and Lehn,1985). Therefore, I hypothesize an increase in the block ownership of spin-offs onaverage.Because it is not clearhow long it takes for a new equilibrium ownership structure to be attained, I use 35 year windowsfrominception.If theincreaseinblockownershipof spin-off
46、sisduetotheshockcreatedby thesignicantlydifferentnature of therm it should getprogressivelysmalleras the impactof the shock decreases over time. I also expect the cross-sectional correlationbetweentheblockownershipof thespin-offanditsinheritedblockownershiptodecreaseovertime.Thisexpectationisconsist
47、entwith the argument that the new ownership structure of spin-offs is not a trivial conversion of the inherited ownership structurebut rather represents a signicant departure from it.Because the ownership structure of spin-offs maychange due to external reasons such as industry factors, I compare th
48、em to aset of matching rms chosen on the basis of size, industry and maturity. Using mature rms makes it possible to compareownership structures that are likely to be in equilibrium to those that are unlikely to be in equilibrium. I expect the changes in theblock ownership of spin-offs to be signica
49、ntly larger than those of the matching rms. Also, the differences in the ownershipstructure of the spin-offs and the matching rms should decrease and the cross-sectional correlation should increase over time.The last two expectations are based on the assumption that a mature, size and industry-matched rm serves as an appropriatebenchmark for a spin-off and that the ownership structure of the spin-off should resemble its benchmark more closely over
