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This paper presents estimates of the effect of voluntary divestiture announcements on shareholder wealth. The results show that both spin‐off and sell‐off announcements tend to have a positive influence on the stock prices of the divesting firms, and that the spin‐offs “outperform” the sell‐offs on the day of the event. We also find that the economic gains to the shareholders of the selling and acquiring firms are nearly identical, suggesting that the sell‐off decision is perceived by both investor groups as a positive net present value (NPV) transaction.

This paper provides evidence that an equity carve‐out is usually the first stage of a two‐stage process either to dispose of parent interest in a subsidiary or eventually re‐acquire the subsidiary's publicly traded snares. Both the initial carve‐out announcement and subsequent sell‐off announcement yield, on average, significantly positive abnormal returns to parent shareholders. In contrast, the parent's price response to a re‐acquisition of subsidiary shares is, on average, insignificantly positive. Both sell‐off and re‐acquisition announcements have a strong positive impact on subsidiary share prices. These gains, however, are offset by the subsidiaries' below‐average return performance preceding the second event.

This paper presents estimates of the effect of a voluntary spin-off announcement on shareholder wealth. The results show that spin-off announcements have a positive influence on stock prices and that the relative increase in share price is greater for large spin-offs than for small ones. A SPIN-OFF OCCURS when a company distributes all of the common shares it owns in a controlled subsidiary to its existing shareholders, thereby creating a separate public company.1 This type of divestiture is in contrast to a sell-off, where the divested assets are purchased and become part of another firm. This paper examines the effect of a voluntary (as opposed to court-ordered) spin-off on the wealth level of shareholders. Several authors (e.g., Alexander et al. [1], Boudreaux [2], and Kummer [12]) have examined the effect of sell-offs on share values. Although Kudla and Mclnish [11] have published an empirical analysis of spin-offs, a sample size of six firms limits the generality of their conclusion that spin-offs increase shareholder wealth. Moreover, the authors use the day that the new shares are distributed as their event date. This paper remedies both of these shortcomings by examining the price behavior of 55 securities around the initial spin-off announcement day. We find that spin-off announcements enhance shareholder wealth and that these announcements usually follow a period of positive abnormal returns. These results are in contrast to the recent sell-off findings of Alexander et al. [1] who conclude that the announcement of a voluntary sell-off does not have a significance influence on the stock prices of divesting firms. Furthermore, they find negative abnormal returns over the 30-day period preceding the event. Section I of this paper considers some theoretical reasons for spin-offs and analyzes their valuation consequences. The research design and empirical findings are presented in Sections II and III, respectively. The paper ends with a summary and conclusions section. * Pennsylvania State University and Emory University, respectively. This paper has benefited greatly from the constructive criticisms of William Beranek, Joseph Sinkey, and participants of the Pennsylvania State Finance Workshop. We are also grateful to Stephen Brown for his assistance in the statistical methodology. ' Fitzhenry [8]. "Control" is defined as the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. The taxation consequences of a spin-off are identical to that of a stock dividend (i.e., it is a tax-free exchange).

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