Do “captive” spin-offs create value? Evidence from Korea

“Captive” spin-offs, in which the spun-off entity becomes a wholly-owned subsidiary of the parent, account for a vast majority of spin-off activities in Korea. Many practitioners have claimed that such spin-offs can be used by the firm's controlling owner as a means of expropriating minority shareholders. We empirically show that, on average, a captive spin-off is followed by substantial decreases in both the stock price and operating performance of the parent firm, which is even more so the case when there is a significant conflict of interest between the controlling owner and minority shareholders.