Anti-Takeover Provisions in Corporate Spin-Offs

Abstract

We empirically analyze the rationale for adopting anti-takeover provisions (ATPs) by examining how ATPs affect corporate spin-offs. We find that firms protected by more ATPs before spin-offs have higher abnormal announcement returns and greater improvement in post-spin-off operating performance than firms with fewer ATPs. Further, firms that reduce the number of ATPs after spin-offs have greater improvement in operating performance than firms that do not reduce the number of ATPs. The CEO of the pre-spin-off firm tends to retain more ATPs in the parent firm and assign fewer ATPs to the spun-off unit if he remains as the CEO of the parent but not the spun-off unit. Our results indicate that the value gains to spin-offs are at least partly due to the reduction in management entrenchment associated with ATPs.

Keywords: Spin-offs, anti-takeover provisions, managerial entrenchment, long-term value creation, announcement return, operating performance

JEL Classification: G30, G34, G38