The Design of Financial Policies in Corporate Spin-offs
We examine differences in financial leverage between parent and spun-off firms that emerge from corporate spin-offs. Our tests control for past financing choices and the costs of adjusting capital structure, factors that can obscure cross-sectional patterns among firms' target leverage ratios. We find that firms that emerge from spin-offs with more financial leverage have a higher cash flow return on assets, lower variability of industry operating income, and a greater proportion of fixed assets. The positive relation between profitability and the use of financial leverage, in a setting that is free of pecking order effects, is particularly important because it contrasts with existing evidence. Our results indicate that the ability to cover debt payments and default-related costs are important determinants of the use of financial leverage, as implied by the trade-off theory of capital structure. We find no evidence that managerial incentives or governance characteristics affect the difference in leverage ratios in firms that emerge from spin-offs. Copyright 2003, Oxford University Press.
Year of publication: |
2003
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Authors: | Mehrotra, Vikas |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 16.2003, 4, p. 1359-1388
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Publisher: |
Society for Financial Studies - SFS |
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