Using Spinoffs to Reduce Capital Mis-Allocations

Using Spinoffs to Reduce Capital Mis-Allocations In this paper, we try to show that mis-allocation of capital in a conglomerate can lead to spinoffs. This mis-allocation arises when internal cash is not allocated efficiently between divisions with differences in growth opportunities. We show that differences in growth opportunities can predict subsequent spinoffs. We also show that differences in growth opportunities are better predictors of spinoffs than either the SIC codes that are used in the corporate focus explanation of spinoffs, or the usual estimates of free cash flow as applied to the conglomerate. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Using Spinoffs to Reduce Capital Mis-Allocations

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1022183521871
Publisher site
See Article on Publisher Site

Abstract

In this paper, we try to show that mis-allocation of capital in a conglomerate can lead to spinoffs. This mis-allocation arises when internal cash is not allocated efficiently between divisions with differences in growth opportunities. We show that differences in growth opportunities can predict subsequent spinoffs. We also show that differences in growth opportunities are better predictors of spinoffs than either the SIC codes that are used in the corporate focus explanation of spinoffs, or the usual estimates of free cash flow as applied to the conglomerate.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

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