Governance, interest alignment and corporate spinoffs

Pao Yue-kong Library Electronic Theses Database

Governance, interest alignment and corporate spinoffs

 

Author: Law, King Wai Justin
Title: Governance, interest alignment and corporate spinoffs
Degree: Ph.D.
Year: 2012
Subject: Corporate divestiture
Corporate governance.
Corporations -- Finance -- Management.
Hong Kong Polytechnic University -- Dissertations
Department: School of Accounting and Finance
Pages: x, 188 p. ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2522707
URI: http://theses.lib.polyu.edu.hk/handle/200/6600
Abstract: The fact that spinoffs create value is well established in the literature. I maintain that spinoffs create value by providing the firms an opportunity to improve interest alignment by re-negotiating the incentives of the CEOs of both the spinoff parent and the spun-off firms, thereby reducing agency costs. Using pay-performance sensitivity to proxy for interest alignment, I find that for the parent firms, spinoff brings a closer association between the change in the CEOs pay with both stock return and return on equity (ROE) after spinoff. In fact, similar results also hold for the spun-off firms. Although I do not find evidence to support my conjecture that focus-increasing spinoffs yields a stronger interest alignment as compared to non focus-increasing spinoffs, this finding is still consistent with the result from Daley et al. (1997). Following corporate governance and agency theory literature, I further examine the impact of four corporate governance constructs - board structure, committee independence, board activities and ownership structure - on the interest re-alignment benefit from spinoff transaction. I find that the overall corporate governance of both the parent and spun-off firms are associated with the interest alignment improvement from the spinoff transaction. In addition, the change in committee independence and the change in overall governance are associated with the interest alignment of the parent firms after spinoff. However, I do not find any association between the change in corporate governance and the interest alignment of the spun-off firms. The absence of results may due to the small sample size. Moreover, for both the parent and spun-off firms, the interest alignment improvement for stronger governance firms is not significantly differ from their counterparts with weaker governance. This finding suggests that both weak and strong governance firms gain similar interest alignment benefits. In spite of this, this result is consistent with findings reported by Ahn and Walker (2007). In sum, my study documents evidence that spinoffs promote interest alignment between the CEO and the shareholders and corporate governance in the spinoff firms matters in this improvement. These findings augment the literature establishing that spinoffs create value by reducing agency costs.

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