Core Focusing Strategy and Share Price Reactions - A study on northern European spin-off announcements

Abstract

This study investigates the short-term shareholder reactions of announced spin-offs in northern Europe. Spin-offs conducted in order to increase core focus of the parent, and spin-offs not conducted for this reason, are distinguished and separately analyzed. Moreover, two research questions are developed with the aim of firstly investigating how announcements affect the short-term wealth of shareholders, and secondly, what potential effect increased industrial focus has on shareholder reactions from spin-offs. By analyzing spin-offs that are announced between 2004 and 2019, significant abnormal returns are found for announcements of spin-offs. When separating the full sample into sub-samples of core focusing spin-offs and non core focusing spin-offs, this study finds that the former results in larger and significant abnormal returns in contrast to the latter which results in insignificant abnormal returns. The difference between these two sub-samples is not significantly different from zero. Furthermore, the evidence of the conducted research shows that specialization does not play an evident role in the emergence of the abnormal returns. Practical implications include that companies which have decided to spin off an entity can expect a short-term positive value effect from shareholders, but not necessarily due to the impact of a potential rationale of focusing on the company’s core business.