Why are proposed spinoffs withdrawn?

While there are economic motives and empirical support for spinoffs, about one in every four planned spinoffs is withdrawn. This study is the first to explain why some spinoffs are withdrawn. We find that the probability that a spinoff is withdrawn is inversely related to the share price response to proposed spinoff announcement. The likelihood of a proposed spinoff withdrawal is also inversely related to the change in the industry conditions of the unit and parent during the spinoff interval. Moreover, a withdrawal is more likely when the change in the unit's industry valuation is less favorable than the parent's industry valuation over the interval, and when the market for takeovers is weak. These results suggest that market timing influences the decision to withdraw a proposed spinoff. Overall, firms are more likely to withdraw their spinoff proposals when their respective industry conditions following the spinoff proposal announcement reduce their potential for extracting hidden value.