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A Theory of Spin-offs and Corporate Growth Value: The Viewpoint of Corporate Governance

A Theory of Spin-offs and Corporate Growth Value: The Viewpoint of Corporate Governance. Chun-An Li & Kun-Chin Lee. Discussant ： Lin Lin. Value ↑↓. ？. Cash flow vs. Control (CDFL, 2000; Lemmon & Lins, 2003). Investor Protection (LLSV, 2000). What Purpose?. Re-focus

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A Theory of Spin-offs and Corporate Growth Value: The Viewpoint of Corporate Governance

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  1. A Theory of Spin-offs and Corporate Growth Value: The Viewpoint of Corporate Governance Chun-An Li & Kun-Chin Lee Discussant：Lin Lin

  2. Value ↑↓ ？ • Cash flow vs. Control (CDFL, 2000; Lemmon & Lins, 2003) • Investor Protection (LLSV, 2000) What Purpose? • Re-focus • Operational Efficiency (Burch & Nanda, 2003; Ahn & Denis, 2004) Spin-offs • Investment Efficiency (Colak & Whited, 2005) Corporate Governance • Information Quality (Krishnaswami & Sabramanium, 1999; Huson & Mackinnon, 2003)

  3. Premise • Controlling shareholders will not approve spin-offs unless • Firms with growth potential: Expropriation vs. Cash flow rights • Given the quality of the board

  4. Focus of My Comments • Avoid pointing out mathematical errors (Point 10 in “Being a Good Referee by K. Choi (2006), Pan-Pacific Management Review 9(1), 88-96) • Focus will be on the “logic” of the paper.

  5. 1. Amendable Assumptions • I think the may be adjustable. (p.7) (Quality of board vs. Transferring costs) • I think the U function could be (Company bear the costs) (p.7) • I think may not be corrected. (p.8) (What about the learning curve of expropriation?) • What is the range of ? Any chance to be negative? (p.10)

  6. 2. Hypothesis • Hypothesis 1,2,3: △Proportion of Controlling Shareholders’ Stocks vs. △ Quality of Corporate Governance of the New Firm, and △ Firm Value • What if they simply want to dump their control of this firm? • What if they increase their shareholdings to facilitate later merger? Results show that mergers usually increase targets’ shareholders’ wealth. • Hypothesis 4,5: Controlling Shareholders’ Cash Flow Rights & Quality of Corporate Governance vs. Change of Tobin’s Q • “Integrity Is Not Enough” (p.237 in Colley Jr. Doyle, Logan, Stettinius 2003, Corporate Governance, New York: McGraw-Hill) • Again, should the measures of quality of corporate governance include the expropriation costs?

  7. 2. Hypothesis (continued) • Hypothesis 6: Diversified Companies’ Decision on Spin-offs • Always Growth-orientated? What if they simply want to dump their control of this new firm because they don’t know how to handle it? (See Inference 1 in page 17) • Hypothesis 7: Premium on spin-offs increases only if there is great improvement of corporate governance afterwards • Well, how much is much?

  8. 3. Inferences • Inference 2: Agency costs ↓ Corporate governance ↑  Investment efficiency & Firm value ↑ • OK. • See Guner, AB, Malmendier, U, and Tate, G. 2005, The Impact of Boards with Financial Expertise on Corporate Policies, Stanford University, working paper. • Inference 3: Information quality↑  Firm value ↑ • Information transparency is not a direct factor of the growth of firm value, but it will help the building up of investors’ trust to the firm and help fund-raising for valuable investment opportunities. • Inference 4: Spinning off for re-focusing on the core business is good • OK. It seems to be consistent with prior researches.

  9. As a Whole …. • Its contribution is obvious. • Understanding of the function of the board quality is important (see, for example, Newsweek 1997). • I sincerely hope my suggestions is useful and this paper will be accepted by the top financial journal.

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