The effects of corporate spin-offs on productivity ☆ Thomas J. Chemmanur a, ⁎, Karthik Krishnan b,1 , Debarshi K. Nandy c,2 a Finance Department, Fulton Hall 440, Carroll School of Management, Boston College, Chestnut Hill, MA 02467, United States b Finance Group, D'Amore Mc-Kim School of Business, Northeastern University, 360 Huntington Avenue, Boston, MA 02115, United States c International Business School, Brandeis University, 415 South Street, Waltham, MA 02453, United States article info abstract Article history: Received 19 December 2011 Received in revised form 7 April 2014 Accepted 11 April 2014 Available online 29 April 2014 Using a unique sample of plant level data from the Longitudinal Research Database of the U.S. Census Bureau, which enables us to correctly identify the parent and spun-off entities prior to spin-offs, we establish that efficiency improves following spin-offs. A spin-off refers to the separation of the management of some assets of a firm into a separate entity (which we term as the spun-off entity or subsidiary). We investigate the underlying mechanisms and the real effects of spin-offs after correcting for potential endogenous selection using treatment effect estimators and propensity score matching in our analysis. We identify how (the precise channel and mechanism), where (parent or subsidiary), and when (the dynamic pattern) efficiency improvements arise following spin-offs. We show that spin-offs increase total factor productivity (TFP) and that such productivity improvements are long-lived. This post spin-off productivity improvement can be attributed to cost savings but not to higher sales. Further, such improvements arise primarily in plants remaining with the parent. However, contrary to speculation in the previous literature, we show that plants that are spun-off do not underperform parent plants prior to the spin-off. We identify acquisitions following spin-offs and find that while productivity improvements occur immediately after the spin-off in non-acquired plants, they start only after being taken over by another firm in acquired plants. Finally, we show that unrelated spun-off entities show greater improvements in productivity compared to related spun-off entities. © 2014 Published by Elsevier B.V. JEL classification: G30 G34 Keywords: Spin-offs Restructuring Endogenous selection Total factor productivity (TFP) 1. Introduction It is well documented that there is a significant improvement in the accounting performance and a corresponding increase in the combined stock market value of firms following corporate spin-offs. 3 The existing literature has supported the idea that spin-offs are generally associated with overall value improvements (as evidenced by positive stock price reactions at announcement and improved accounting performance, or by increases of investment efficiency measures, such as the relative investment ratio (RINV) or the sensitivity of investment to industry-median q). However, prior studies that are based only on accounting data are unable to answer many important questions regarding corporate restructuring in general and spin-offs in Journal of Corporate Finance 27 (2014) 72–98 ☆ The research in this paper was conducted while the authors were special sworn research associates at the Boston Research Data Center of the U.S. Census Bureau. Research results and conclusions expressed are those of the authors and do not necessarily indicate concurrence of the U.S. Census Bureau. This paper has been screened to ensure that no confidential data is revealed. Any errors and omissions are the responsibility of the authors. ⁎ Corresponding author. Tel.: +1 617 552 3980; fax: +1 617 552 0431. E-mail addresses: chemmanu@bc.edu (T.J. Chemmanur), k.krishnan@neu.edu (K. Krishnan), dnandy@brandeis.edu (D.K. Nandy). 1 Tel.: +1 617 373 4707. 2 Tel.: +1 781 736 8364; fax: +1 781 736 2269. 3 A corporate spin-off occurs when a firm creates a subsidiary to hold a portion of its assets, and then distributes the shares of the subsidiary on a pro-rata basis to its existing shareholders to create an independent company. Thus, no new capital is raised by the joint firm in spin-offs. http://dx.doi.org/10.1016/j.jcorpfin.2014.04.005 0929-1199/© 2014 Published by Elsevier B.V. Contents lists available at ScienceDirect Journal of Corporate Finance journal homepage: www.elsevier.com/locate/jcorpfin