Corporate Spin-offs and the Wealth of Shareholders: Evidence from India

Abstract

For the past few decades, spin-offs have become a popular restructuring strategy among Indian businesses; however, there is little research on how the Indian market responds to this development. This article examines the effect of spin-offs on stock prices in the wake of the announcement of this event by employing the event study methodology. The results are based on 163 spin-off announcements of companies listed on the Bombay Stock Exchange over a 24-year period from 2000 to 2023. Using the market model, the study has identified positive cumulative abnormal returns of 3.32% during the days surrounding the spin-off announcement. Moreover, sector-wise returns are also examined, and it is found that all sectors react positively to the announcement of spin-offs, with the trading sector generating the highest cumulative returns of 7.03%. This study contributes to the limited literature on the effects of spin-offs on shareholders’ wealth in India by adopting a relatively longer period to include the influence of all corporate spin-offs since they became tax-free in 2000, testing the robustness of results through various parametric and non-parametric tests, which has not been done earlier in any of the limited studies conducted in the Indian context, and also enhancing the analytical depth of the results by performing a sector-wise analysis of these returns. These findings can assist corporate policymakers in considering spin-offs as a feasible strategy for increasing shareholders’ value. They may also affect the spin-off announcement timing since companies may want to take advantage of favourable market conditions. Besides, they could aid potential investors in their decision to invest in companies with spin-off prospects.