The Market Success of Corporate Spin-offs: Do CEO External Directorships, Age, and Their Interactions Matter?

Abstract

Corporate spin-offs have been a major “preferred” restructuring technique in the previous couple decades in the U.S. This corporate transaction aims to create value for both divesting firm and its subsidiary. This study examines an understudied interaction of CEO external directorships and age (as well as their direct effects) in the strategy literature on the change in market valuation of spun-off subsidiaries. By drawing our cases from the SDC Platinum database, we identified 138 completed corporate U.S. spin-offs that took place between 2000 and 2014. Our empirical analysis indicates that the number of CEO external directorships as well as having a younger CEO positively and significantly affect the change in market valuation. In addition, our interaction effect shows significant results. Grounded in the upper echelons and resource dependence theories, this study contributes to the corporate governance literature in terms of understanding whether two particular CEO characteristics and their interactions hold a great deal of importance for spun-off subsidiaries’ market performance. From the perspective of managerial implications, this study suggests that having a younger CEO along with holding many external directorships will help these spun-off subsidiaries much better perform in the market.