Capital Structure in Corporate Spin‐Offs

In a spin‐off, the parent divides the assets of the firm and chooses the capital structure for the new, stand‐alone entity. I therefore use this sample to investigate how firms determine their capital structure. I find that the subsidiary has a leverage ratio lower than the parent's but similar...

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Bibliographic Details
Published in:	The Journal of business (Chicago, Ill.) Ill.), 2004-01, Vol.77 (1), p.9-43
Main Author:	Dittmar, Amy
Format:	Article
Language:	eng
Subjects:	Business strategies Business studies Capital expenditures Capital structure Collateral Convertible bonds Corporate finance Corporate profits Costs Debt Debt market Debt repayment Divestiture Employee stock ownership plans Enterprises ESOP Financial leverage Financial management Income taxes Market value Profitability Ratios Secured debt Spinoffs Studies Subsidiaries Subsidiary Subsidiary companies
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Summary:	In a spin‐off, the parent divides the assets of the firm and chooses the capital structure for the new, stand‐alone entity. I therefore use this sample to investigate how firms determine their capital structure. I find that the subsidiary has a leverage ratio lower than the parent's but similar to that of a comparable non‐spin‐off firm. Growth opportunities are the primary determinant of the subsidiary’s leverage. Profitability has no impact on leverage choice. These results support the predictions of the trade‐off theory of capital structure and provide insight into why previous studies find a negative relation between leverage and profitability.
ISSN:	0021-9398 1537-5374