Using Spinoffs to Reduce Capital Mis-allocations.

In this paper, we try to show that mis-allocation of capital in a conglomerate can lead to spinoffs. This mis-allocation arises when internal cash is not allocated efficiently between divisions with differences in growth opportunities. We show that differences in growth opportunities can predict subsequent spinoffs. We also show that differences in growth opportunities are better predictors of spinoffs than either the SIC codes that are used in the corporate focus explanation of spinoffs, or the usual estimates of free cash flow as applied to the conglomerate. Copyright 2003 by Kluwer Academic Publishers