This study investigates the importance of reduced capital misallocation in explaining the gains in corporate spinoffs. The capital misallocation hypothesis asserts that the internal capital market of a diversified firm fails to meet the needs of the relatively low growth divisions for less investment and the needs of the relatively high growth divisions for more investment. Higher differences in growth opportunities imply that more capital is misallocated. This study finds that the higher the difference in growth opportunities of a diversified firm's businesses, the more likely the firm is to conduct a spinoff. This finding supports the argument that diversified firms conduct spinoffs to reduce capital misallocation. This study finds differences in managerial ownership of spinoff firms and of nonspinoff firms. This suggests that the misallocation of internal capital is an agency problem. A low management ownership stake, coupled with the existing differential in growth opportunities between parent and spunoff firms, leads to misallocation of internal capital, thus creating incentives for a spinoff. Spinoffs should result in a shift to the “right" investment policy and to better operating performance for both the parent and spunoff firms. This improvement in operating performance for the post-spinoff firms is expected to be higher when they are from highly different growth opportunity spinoffs. I find mixed evidence regarding market reaction, changes in investment policy, and changes in operating performance. The evidence that supports the capital misallocation hypothesis does not appear uniformly and consistently across the proxies for growth opportunities. However, there is evidence that both parent and spunoff firms benefit from a spinoff. The magnitude of the benefits is larger for spunoff firms than for parent firms. This is as expected because the capital misallocation problem may be reduced, but does not entirely disappear, in the parent firm.

Spinoffs are an increasing phenomenon on the Swedish stock market. In this report one can read about factors that trigger spinoffs as well as about the short and medium term risk and return that spinoffs yield. I have observed 17 pre-spinoff companies that become 34 post-spinoff companies which continued to be traded on the stock market. For the purpose of the investigation I use time-series regression, and my model is the sin-gle-factor market model. I use this model to estimate the beta and the firm specific factor. Supporting theories are: efficiency, portfolio theory, valuation method and asymmetry all those topics are central parts in a spinoff. From my research I can not prove that spinoffs increase shareholders wealth. That means that the new units created through a spinoff are not more worth than the old corporation as such the new units do not outperform the old conglomerate structures expected return. However, the new units beta is not equal the old conglomerate structures beta, and this may due to change in capital structure. The weighted beta increase in half of the times, as such, it suggests a higher level of debt financing. By comparing the spinoff company and the parent company in the post-spinoff scenario it can be concluded that the company who is performing the best is also the riskier alternative and the spinoff performs better than the parent company in eleven out of seventeen times. There is also a correlation between risk and return - when higher return is observed it also brings higher risk, and it holds true in all samples except one. Further, at group level the spinoff group performs better than the market return and the spinoff group performs on average better than the parent group. Thus, if an outside inves-tor is to invest in either a spinoff company or a parent company one should buy the spinoff company at preferred weight according to the investors risk preferences.

<p>Spinoffs are an increasing phenomenon on the Swedish stock market. In this report one can read about factors that trigger spinoffs as well as about the short and medium term risk and return that spinoffs yield. I have observed 17 pre-spinoff companies that become 34 post-spinoff companies which continued to be traded on the stock market.</p><p>For the purpose of the investigation I use time-series regression, and my model is the sin-gle-factor market model. I use this model to estimate the beta and the firm specific factor. Supporting theories are: efficiency, portfolio theory, valuation method and asymmetry all those topics are central parts in a spinoff.</p><p>From my research I can not prove that spinoffs increase shareholders wealth. That means that the new units created through a spinoff are not more worth than the old corporation as such the new units do not outperform the old conglomerate structures expected return. However, the new units beta is not equal the old conglomerate structures beta, and this may due to change in capital structure. The weighted beta increase in half of the times, as such, it suggests a higher level of debt financing.</p><p>By comparing the spinoff company and the parent company in the post-spinoff scenario it can be concluded that the company who is performing the best is also the riskier alternative and the spinoff performs better than the parent company in eleven out of seventeen times. There is also a correlation between risk and return - when higher return is observed it also brings higher risk, and it holds true in all samples except one.</p><p>Further, at group level the spinoff group performs better than the market return and the spinoff group performs on average better than the parent group. Thus, if an outside inves-tor is to invest in either a spinoff company or a parent company one should buy the spinoff company at preferred weight according to the investors risk preferences.</p>