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RFS Advance Access originally published online on July 6, 2006
Review of Financial Studies 2007 20(3):557-595; doi:10.1093/rfs/hhl022
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Right arrow G31 - Capital Budgeting; Fixed Investment and Inventory Studies
Right arrow G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Right arrow G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org.

Spin-offs, Divestitures, and Conglomerate Investment

Gönül Çolak
Wichita State University

Toni M. Whited
University of Wisconsin

Address correspondence to Toni M. Whited, Department of Finance, University of Wisconsin, 975 University Avenue, Madison, WI 53706-1323, or e-mail: twhited{at}bus.wisc.edu.

We examine whether spin-offs or divestitures cause improvements in conglomerate investment efficiency. At issue are endogeneity of these restructuring decisions and correct measurement of investment efficiency. Endogeneity is a problem because the factors that induce firms to spin off or divest divisions may also improve investment efficiency; measurement error is a problem because efficiency measures employ Tobin’s q as a noisy proxy for investment opportunities. We find important differences between firms that divest or spin off and a control sample. After accounting for these differences and for measurement error in q, we find no evidence of improvements in investment efficiency. (JEL G31, G34)


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