Price pressure in corporate spinoffs

Institutional investors who acquire stock via equity distributions from stocks they already own tend to sell these holdings immediately, especially if the spinoff is much smaller, or in a different industry, than the parent. However, these sales are partially offset by purchases from investors that specialize in the characteristics of the spinoff. In a large sample of spinoffs between 1980 and 2004, we show that shortrun returns following corporate spinoffs are related to predictable changes in ownership composition. The more similar are the parent and the spinoff, the lower is the change in ownership and the smaller is the price decline following distribution. The relative sizes of the preand post-spinoff firms play a significant role in explaining ownership changes and their corresponding effects on price. Fund flow driven purchases, however, are modest and exert no effect on price.