The wealth effects of cross-border spinoffs

This paper examines the stock price reaction to cross-border spinoff announcements and investigates whether country characteristics (such as takeover market liquidity and investor protection) cause variation in the announcements’ wealth effects. We observe a positive and significant price response to cross-border spinoff announcements. The wealth effects are higher when subsidiaries are located in countries with more active takeover markets. This result implies that investors could expect the newly spun-off companies to become takeover targets. Abnormal returns are lower when subsidiaries are located in countries with weaker investor protection relative to the home country of the parent multinational. We infer that cross-border spinoffs that result in adverse changes in investor protection elicit lower wealth effects. The implications for managers are that spinning off units in foreign markets could generate wealth for parent shareholders, whereas the characteristics of the markets in which the units are spun-off matter to investors.