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The Design of Financial Policies in Corporate Spin-offs.
- Source :
- Review of Financial Studies; Winter2003, Vol. 16 Issue 4, p1359-1388, 30p
- Publication Year :
- 2003
-
Abstract
- We examine differences in financial leverage between parent and spun-off firms that emerge from corporate spin-offs. Our tests control for past financing choices and the costs of adjusting capital structure, factors that can obscure cross-sectional patterns among firms' target leverage ratios. We find that firms that emerge from spin-offs with more financial leverage have a higher cash flow, return on assets, lower variability of industry operating income, and a greater proportion of fixed assets. The positive relation between profitability and the use of financial leverage, in a setting that is free of pecking order effects, is particularly important because it contrasts with existing evidence. Our results indicate that the ability to cover debt payments and default-related costs are important determinants of the use of financial leverage, as implied by the trade-off theory of capital structure. We find no evidence that managerial incentives or governance characteristics affect the difference in leverage ratios in firms that emerge from spin-offs. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 08939454
- Volume :
- 16
- Issue :
- 4
- Database :
- Complementary Index
- Journal :
- Review of Financial Studies
- Publication Type :
- Academic Journal
- Accession number :
- 11473871
- Full Text :
- https://doi.org/10.1093/rfs/hhg027