470 V. Maksimovic and G. Phillips
The sensitivity of Tobin’sqcaptures the idea that the more efficient a firm is, the more it
should respond to changes in investment opportunities by altering its investment policy.
In order to get around the problem that the median industry Tobin’sqis an imper-
fectly measure of investment opportunities for an individual firm,Gertner, Powers and
Scharfstein (2002)paper examines the same firm’s sensitivity of investment to Tobin’s
qbefore and after the spinoff. They find that segment sensitivity to industry Tobin’sq
increases after the segment spinoff and that changes are related to the stock market’s
reaction to the spinoff decision.
Dittmar and Shivasani (2003)find that the announcement returns for divestitures are
significantly correlated with the change in the diversification discount. Larger decreases
in diversification are associated with higher announcement returns. Dittmar and Shiv-
dasani also find that RSZ measures of the efficiency of segment investment increase
substantially following the divestiture and that this improvement is associated with
a decrease in the diversification discount. One can interpret this evidence in several
ways. The evidence is consistent with the firm divesting divisions will now be run more
efficiently. Alternatively, the evidence is also consistent with changes in investment op-
portunities for the divesting firm or its divisions and thus the market responds positively
as firms change their investment.
Burch and Nanda (2003)examine whether changes in value following spinoffs are re-
lated to measures of investment diversity by reconstructing the diversified firm after the
spinoff. They construct changes in value using both industry multiples and also using
firm-specific measures. To avoid the measurement error problem of assessing opportu-
nities using industry measures, they also use an ex post, direct measure of excess value
based on the post-spinoff market-to-book values of the divested division(s) and remain-
ing parent firm. As they note, using ex-post data implicitly assumes that diversity in
post-spinoff investment opportunities is a reasonable proxy for the diversity prior to the
spinoff. Using these measures, they find that improvements in aggregate excess value
(changes in the implicit discount less the actual pre-spinoff discount) depends signif-
icantly on direct measures of diversity and changes in measures of diversity based on
industry proxies.
Anh and Denis (2004)also examine the changes in measure of investment efficiency
from RSZ pre- and post-spinoff. They find that post-spinoff, measures of investment
efficiency increase for the hypothetical combined firm—combining the post-spinoff di-
visions with the parent in order to examine the total impact of the spinoff decision. They
also find that the measures of investment efficiency increase the most for firms with the
highest dispersion in the segment Tobin’sqs from single-segment firms. They do note
two caveats to their analysis. First, they note that by focusing just on firms that choose
to spinoff divisions, they may be focusing on the set of firms with more severe invest-
ment inefficiencies. Second, they note that other changes in the investment opportunity
set may be driving firms to spinoff and also contributing to the observed changes in
investment efficiency.
Colak and Whited (2005)show the caveats noted in these papers are important. Their
results challenge the view that these spinoffs and divestitures provide evidence that firms