J. Randall Woolridge

Restructuring through spinoffs*1: The stock market evidence

Abstract We investigate the value created through spinoffs over the 1965–1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.

Reverse Splits and Shareholder Wealth

perfect capital markets, neither reverse nor direct splits influence shareholder wealth. In practice, however, market imperfections such as transactions costs and information asymmetries can be cited in defending splits as management tools. In their seminal article, Fama, Fisher, Jensen, and Roll [2] analyze the impact of direct splits on stockholder returns. Their conclusion, which has been corroborated in subsequent studies, is that direct splits, per se, have no effect on shareholder wealth.

Value Creation from Equity Carve-Outs

Using a large sample of equity carve-out events during the 1980s and 1990s, we find that rivals of carve-out parent firms display negative announcement-period returns. This finding distinguishes the divestiture gains hypothesis from the asymmetric information hypothesis. Additional tests provide further support for the divestiture gains hypothesis. Operating performance improvements for both parents and their carved-out subsidiaries are evident.

An analysis of exchangeable debt offers

Abstract Exchangeable debt is convertible into the common stock of a target firm in which the issuing firm has an ownership position. It signifies a potential change in the issuing firms asset composition through the divestiture of the ownership stake in the target firm. We find that announcements of exchangeable debt offers are associated with insignificant abnormal returns for the shareholders of issuing firms. The target firms share price declines, however, when an exchangeable debt offer is announced. This result is consistent with the offers potential to reduce the ownership concentration of the target firms common stock.

Performance of Stocks Recommended by Brokerages

Examination of performance over 1993–2002 indicates that average quarterly and cumulative returns of stocks recommended by brokerage firms are slightly below the returns of the S&P 500. And recommended stock returns are more volatile. Stocks recommended by top-tier brokerage firms perform more poorly than those recommended by mid-tier or regional firms. There is considerable variability across recommendations of individual brokerage firms. The stock recommendations of Merrill Lynch and Raymond James show the best results among top-tier and mid-tier or regional brokerage firms. On a risk-adjusted basis, only stocks recommended by three of the ten brokerage firms with a full ten years of data outperformed the S&P 500.