An Empirical Investigation of Capital Structure in US Corporate Spinoffs

Abstract

This article aims to examine the leverage choice in a corporate spin-off with those of counterparts. The factors that determine the choice of leverage in a spin-off differ from those that influence leverage ratios in firms those were not subject of spin-off. The sample used in this study consists of completed spin-offs announced between 1992 and 2016 in USA. The two competing capital structure theories-trade-off and pecking order are tested for the above-mentioned sample in this study. The results in this article are consistent with the predictions of the trade-off theory and indicate that firms weigh the costs and benefits of debt when they make capital structure decisions. Empirical studies using year-end debt ratios of firms therefore distort the impact of the factors influencing leverage choice. This study avoids the problem faced by researchers when firms deviate from target leverage ratio by investigating the capital structure of a divested subsidiary in a spin-off.

Keywords: Spin-off, capital structure theories

DOI: 10.7176/RJFA/10-13-02

Publication date:July 31^st 2019