TAILIEUCHUNG - How does market react to corporate spin-offs in Australia

While numerous studies on spin-off have been done in the US and Europe, little efforts have been directed to research this area of corporate finance in Australia. This study investigates how market reacts to corporate spin-offs in this country. | 54 Nguyen Xuan Truong / Journal of Economic Development 24(1) 54-74 How does market react to corporate spin-offs in Australia? NGUYEN XUAN TRUONG Hanoi University – truongnx@ ARTICLE INFO ABSTRACT Article history: While numerous studies on spin-off have been done in the US and Europe, little efforts have been directed to research this area of corporate finance in Australia. This study investigates how market reacts to corporate spin-offs in this country. We employ traditional event study methodology and find that market reacts strongly and positively to the announcements of spin-offs. Specifically, the cumulative average abnormal return over the 3-day event window is . The cumulative average abnormal return for spin-offs by companies that increase their industrial focus is and for non-focused increasing spinoffs. Nevertheless, the difference between these two subgroups is statistically insignificant. Multivariate regressions provide evidence that high pre-leverage firms benefit more from spin-offs. Received: Sep. 19, 2016 Received in revised form: Oct. 27, 2016 Accepted: Dec. 31, 2016 Keywords: Spin-offs Price reactions Cumulative abnormal returns. Nguyen Xuan Truong / Journal of Economic Development 24(1) 54-74 1. Introduction Corporate divestiture includes asset saleoff, equity carve-out, corporate spin-off, and liquidation1. While other types of divestments usually involve cash transaction (. sale-off) or cease of existence of subsidiaries (. liquidation), a spin-off results in creation of a new independent company from a subsidiary or division of the parent company. Shareholders of the parent company will receive shares of the new company on pro rata basis. Upon completion, they hold shares in both the parent firms and the subsidiary. In the US, distributed shares in the subsidiary are considered tax-free dividends2. In Australia, spin-off is considered as a “demerger” for tax purpose3. Numerous studies relating to .

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