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Spin-offs, Divestitures, and Conglomerate Investment

Gönül Çolak and Toni M. Whited
The Review of Financial Studies
Vol. 20, No. 3 (May, 2007), pp. 557-595
Stable URL: http://www.jstor.org/stable/4494781
Page Count: 39
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Spin-offs, Divestitures, and Conglomerate Investment
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Abstract

We examine whether spin-offs or divestitures cause improvements in conglomerate investment efficiency. At issue are endogeneity of these restructuring decisions and correct measurement of investment efficiency. Endogeneity is a problem because the factors that induce firms to spin off or divest divisions may also improve investment efficiency; measurement error is a problem because efficiency measures employ Tobin's q as a noisy proxy for investment opportunities. We find important differences between firms that divest or spin off and a control sample. After accounting for these differences and for measurement error in q, we find no evidence of improvements in investment efficiency.

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