Results

Descriptive statistics are presented in Table 4.2, which contains means, standard deviations, and correlations of all variables analyzed in this study. The dependent variable, child's operating profit ratio (COPR), is significantly correlated with parent's advertising intensity (PAI), parent's R&D intensity (PRI), and child’s industrial production growth (CIPG). Additionally, Table 4.2 explicates the dispersive performance among newly spun-off firms. The standard deviation of COPR (23.13) is much greater than its mean (14.19).

--- Insert Table 4.2 about here ---

Table 4.3 reports the results of the OLS regression analysis. The coefficients in Table 4.3 are non-standardized. The standard errors are listed next to the coefficients. All of the models are operated with the same dependent variable (COPR). Model 1 presents the results of testing the full set of control variables only. Model 2 and Model 3 include the internal variables and the external variables, respectively. The last (Model 4) is a joint test of all independent variables and the controls.

--- Insert Table 4.3 about here ---

The first set of hypotheses deals with the supportive resource endowments from parent firms. Referring to the positive and significant coefficients of PAI in models 2 and 4 (1.68 [p < .05]; 1.35 [p < .05]), the invested marketing resources of the parent firm have a positive effect on the profitability of the child firm. Hypothesis 1a predicts that the

marketing investments of the parent firm are positively associated with the child firm’s performance. Hence, these findings provide support for Hypothesis 1a. Hypothesis 1b proposes that the invested technological resources of the parent firm are positively related to the child firm’s performance. Even when not statistically significant, the results of Model 2 show the negative relation between PRI and COPR. In addition to the significantly negative coefficient in model 4, Hypothesis 1b, therefore, is not supported.

Hypotheses 2a and 2b verify the positive effects of external environments on the child firm’s performance. In models 3 and 4, the coefficients of CSIG are positive but insignificant, indicating that the effect of the growth of capital market on the child firm’s profit ratio is positive but not sufficient enough to predict the child firm’s performance.

For this reason, Hypothesis 2a does not receive support. On the other hand, the result supports Hypothesis 2b because the coefficients of CIPG are positive and significant both in models 3 and 4 (1.77 [p < .05]; 1.30 [p < .01]). As predicted, the extent of the child firm’s industrial growth is positively related to the profitability of the child firm.

4.5 Discussion

This exploratory study investigates the relationships among the performance of child firms, the supportive endowments of parent firms, and the growing opportunities in the market. The findings contribute to the literature by illuminating the ignored role of environmental elements in determining the profitability of spun-off firms. Exploiting the environmental opportunities in the market enables the newly established firms to capture marketing advantages and financial resources and, therefore, capitates them to expand their business and stabilize their performance. Proactively recognizing the environmental opportunities and designing respondent activities accelerates the future developments of spun-off firms. As previously evidenced, the external opportunities significantly affect

the spun-off firms’ performance. Concerning the environmental elements, further research could extend this work by examining the effect of other extrinsic factors, such as competitive conditions, on the outcomes of spin-offs.

From relatedness to supportive endowments, this study extends in a novel direction to investigate the influence arising from parent-child pairs on the performance of child firms. With support from the parent firm, the child firm is more likely to utilize the amplified resource basis to formulate its distinctiveness. In return, the newly formulated competences may support the parent firm. This positive relationship between the parent and the child denotes that the spin-off approach allows the parent-child pairs to increase their synergies and competitiveness. In this vein, an interesting extension of this study would be to examine more types of parent-child relations, besides relatedness, influencing the consequence of spin-offs.

The benefits of corporate spin-offs have been expounded by scholars and practitioners for decades. Reducing the corporate diversification level for refocusing and, at the same time, clarifying the market value of separated parts have been widely studied (Krishnaswami & Subramaniam, 1999). However, this study presents that the diversification level of parent firms, a control variable in all of the models, has statistically no influence on the performance of spun-off firms, given that corporate diversity has been verified as an important antecedent of spin-offs in the literature.

The results indicate that intrinsic and extrinsic factors are critical to the consequences of spin-offs. Stated differently, taking both internal and external perspectives enhances the completeness of the spin-off decision. Starting from designing the resources to be separated, practitioners require to conduct the inside-out step by matching the allocated resources with external conditions. Next, after identifying environmental opportunities, the outside-in step must be conducted to compare the level

of resource deployments with those required for exploiting the profitable opportunities.

Conducting both of these steps will improve the outcomes of spin-offs.

4.6 Conclusion

Insufficient attention has been devoted to the influence of external elements while the extant literature manifested spin-off events with multiple internal perspectives. To complement the current knowledge on spin-offs, this study seeks to link the consequences with external factors and internal elements while empirically analyzing the critical roles of supportive endowments and environmental opportunities in determining the performance of child firms. Building on a sample of spin-off events, the findings suggest that the firms should adopt the reciprocal perspectives from inside to outside and contemplate the overall performance of the parent and the child when they evaluate spin-off approaches for organizational growth or restructuring their business.

Figure 4.1 Conceptual Framework: Supportive Endowment and Environmental Opportunity

Supportive Endowment

Marketing Investment Technological

Investment

Environmental Opportunity

Capital Market

Product Market

Performance of Spun-off Firm

H1a (+) , H1b (+)

H2a (+) , H2b (+)

TABLE 4.1 Previous Studies of Spin-off

Study Research Question Data Major Findings

Parent firm and antecedent: Financial perspective Hite and

Spin-off events are positively associated with CARs over the broad intervals.

No support is found regarding the shareholders’ gains transferred from bondholders or other securityholders.

The broad-interval CARs are positive related to firms spinning off following mergers or for specialization; the negative CARs are related to firms spinning off for legal or regulatory difficulties.

CAR (2-day interval surrounding announcement) is positive for all above groups and positively related to the fraction of spun off equity.

The share price reaction of spin-off events is significantly positive.

Little evidence of shareholders’ gains transferred from bondholders is provided.

Shareholders’ gains result from improved managerial efficiency and/or tax and regulatory advantages.

Miles and

Spin-off announcements have a positive effect on stock prices.

Large spin-off events have a stronger positive influence on shareholders’ gains relative to small spin-offs (market value of child < 10% market value of parent).

Vijh (1994) the wealth gains (from financial

The excess ex-date returns arise from a variety of

microstructure considerations: spin-offs leading to better valuation of each business and attraction of different investors; the merger returns earned by the target shareholders further prove the effect of microstructure considerations.

Firms engaged in spin-off events have higher degrees of information asymmetry; the information problems decrease after spin-off events.

Shareholders’ gains are positively associated with the levels of information asymmetry.

Firms tend to spin off with higher growth opportunities and with need for external capital.

Maxwell and

Shareholders’ gains are partially transferred from bondholders.

Spin-off events are negatively related to the reaction of bond markets.

TABLE 4.1 (continued) Previous Studies of Spin-off

Study Research Question Data Major Findings

Parent firm and antecedent: Managerial perspective Ito and Rose

Japanese firms use spin-offs as flexible changes with separating core

As a corporate strategy of growth, spin-offs enable child firms to develop new competences and provide parent firms with an alternative of diversification to survive in a turbulent environment.

Three distinct groups of spin-off events are found: (1) developing new

Firms with related assets and low diversification tend to adopt spin-offs, in turn realizing higher CAR for reducing information asymmetries.

Firms with unrelated assets and high diversification tend to adopt sell-offs, in turn realizing higher CAR for reducing information asymmetries.

Firms with more sell-off experience are more likely to use sell-offs again, in turn increasing CAR.

Firms with more recent spin-off experience are more likely to use spin-offs again, in turn increasing CAR.

López

Firms are more likely to spin off when they have intense social networks, high knowledge investments, and high diversification.

TABLE 4.1 (continued) Previous Studies of Spin-off

Study Research Question Data Major Findings

Child firm and consequence

The performance of child firms is not significantly improved after spin-offs.

The design of child firms’ internal control mechanisms can be seen as efficient. source of CAR and is associated with parent firms only. This is consistent with the Corporate Focus Hypothesis.

Child firms improve the allocation of capital after spin-offs for unrelated events or within a favorably reacted stock market.

The performance of child firms is negatively related to having too many links to the parent firm and positively related to having some links.

CAR is cumulative abnormal return associated with the movement of stock price.

TABLE 4.2

Descriptive Statistics and Pearson Correlation Coefficients

Variable n Mean s.d. 1 2 3 4 5 6 7 8

1. Child’s operating

profit ratio (COPR) 29 14.19 23.13 2. Parent's advertising

intensity (PAI)

29 7.35 7.88 .59^†

3. Parent's R&D

intensity (PRI) 29 3.33 3.21 -.34^† -.26 4. Child’s stock index

growth (CSIG) 29 20.55 44.50 .06 -.21 -.05 5. Child’s industrial

production growth (CIPG)

28 10.86 6.57 .47^† .28 .08 .11

6. Transaction size 29 12.77 14.28 .25 -.01 -.07 .34^† .11 7. Parent's return on

equity 29 13.35 1.47 -.12 -.32^† .02 .46^† .13 .11 8. Parent's firm size 29 16.59 1.42 .17 -.08 -.16 .04 .11 .63^† .02 9. Parent's Herfindahl

index 29 0.48 0.22 -.12 -.26 .04 .07 .10 .04 -.08 .06

† p < .10

TABLE 4.3

Results of Regression Analyses: Child Firm’s Operating Profit Ratio

Variable Model 1 Model 2 Model 3 Model 4

Control variables

Transaction size 4.13 [4.49] 3.17 [3.46] 3.00 [4.10] 1.85 [2.95]

Parent's return on equity -0.26 [0.34] 0.07 [0.18] -0.47 [0.44] -0.26 [0.24]

Parent's firm size 0.25 [3.96] 0.98 [4.05] -0.19 [3.82] 0.06 [3.92]

Parent's Herfindahl

index -14.71 [13.58] 3.29 [10.34] -20.23 [14.10] -3.20 [9.47]

Independent variables Parent's advertising

intensity (PAI) 1.68* [0.71] 1.35* [0.56]

Parent's R&D intensity

(PRI) -1.22 [0.90] -1.93* [0.86]

Child’s stock index

growth (CSIG) 0.04 [0.10] 0.06 [0.10]

Child’s industrial production growth (CIPG)

1.77*

[0.72]

1.30**

[0.43]

Model F 1.21 5.13** 3.34* 7.24***

R² 0.10 0.44 0.35 0.62

N 29 29 28 28

* p < .05; ^** p < .01; ^*** p < .001

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