Predictability of Long-Term Spinoff Returns.pdfVIP

Predictability of Long-Term Spinoff Returns John J. McConnell∗ Krannert School of Management Purdue University and Alexei V. Ovtchinnikov Krannert School of Management Purdue University First draft: January 26, 2004 This draft: March 28, 2004 ∗ The author may be contacted at: Purdue University, Krannert Graduate School of Management, 403 W. State St, West Lafayette, IN 47907-2056, tel: 765-494-5910, fax: 765-494-9658 e-mail: mcconnell@mgmt.purdue.edu. Abstract Investment strategies of buying and holding recently spun off companies and their parents have received significant attention from the investment community in the recent past. Despite their popularity, the existing evidence on the attractiveness of spinoffs appears piecemeal. In this paper, we examine in detail stock price performance of spinoffs and their parents on a comprehensive sample that covers the last 36 years. We show that excess returns are indeed positive for both subsidiary and parent companies over almost all holding periods considered. For subsidiaries the results appear both economically and statistically significant after various adjustments for risk. This evidence is consistent with investors earning an above normal rate of return by investing in recently spun off subsidiaries. For parents, however, after correcting for one very large positive outlier, returns are not statistically or economically different from zero. On April 4, 1996 Lucent Technologi