Do Spinoffs Create Value in Hong Kong?

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Cited in

Published date	16 October 2009
Pages	23-32
DOI	https://doi.org/10.1108/15587890980000416
Date	16 October 2009
Author	Terence Tai‐Leung Chong,Daniel Wai‐Hong Wong,Venus Khim‐Sen Liew
Subject Matter	Strategy

Journal of Asia Business Studies FALL 2009

INTRODUCTION

Over the last decade, Hong Kong has emerged as a major global

center of capital formation. In 2004, Hong Kong overtook major ﬁ-

nancial centers like Tokyo and London to become the world’s third

largest market in terms of total equity funds raised. Such performance

was mainly due to global interest in the emergence of the Mainland

China economy, for which Hong Kong has served as the premier

fund-raising platform. According to the statistics of the Hong Kong

Stock Exchange, the market capitalization of China-related stocks in

the Main Board was less than 5% of its total market capitalization in

1993. The ﬁgure rose to 37% in 2005. The large-scale fund raising

activities in Hong Kong over the past few years included some of

the world’s largest IPOs such as China Life Insurance Company and

the China Construction Bank. Because of the relatively good market

conditions, many companies have taken the opportunity to spin off

their businesses.

There is a general consensus in the literature that corporate spi-

noffs create values for shareholders and exhibit positive long-run

excess returns (Veld and Veld-Merkoulova, 2004). Spinning-off un-

related businesses can free managers from operations unrelated to

companies’ core businesses and eliminate negative synergies between

parents and subsidiaries (Schipper and Smith, 1983; Daley et al.,

1997; Desai and Jain, 1999). Besides, a ﬁrm that is undervalued due

to information asymmetry will experience an improvement in mar-

ket valuation with the separation of its divisions into independently

traded units through a spinoff (Gilson et al., 1998; Krishnaswanmi

and Subramaniam, 1999; Huson and MacKinnon, 2003). A number

of studies have suggested other sources of abnormal returns from

corporate spinoffs (Slovin et al, 1995; Shleifer and Vishny, 1997; Al-

len, 2001; McConnell et al., 2001; Mansi and Reed, 2002). However,

most of the aforementioned studies are conﬁned to the US and the

European cases. The spinoff cases for Asia have never been investi-

gated. In this paper, we examine if the conventional wisdom on the

beneﬁts of spinoffs can be automatically extended to the cases in

Hong Kong, the center of capital formation in Asia. The remaining

of this paper is organized as follows. The estimation results concern-

ing the spinoff returns for the case of Hong Kong will be presented

in Section 2. Section 3 reports the results of company ﬁnancial ratio

analysis. Section 4 concludes the paper.

peRfORmaNCe Of The sTOCk pRICes

We analyze a sample of Hong Kong spinoffs covering the period

from January 1994 to June 2003. The subsidiaries divested in the

spinoff transactions are identiﬁed by checking South China Morning

Post articles on Lexis-Nexis. Data on stock prices and the ﬁrst trading

dates of spinoffs are extracted from bigcharts.com. We only consider

cases where both parent ﬁrms and spinoffs are listed in Hong Kong.

A summary of the ﬁnal sample consisting of 21 spinoffs, together

with their business classiﬁcation are given in Table 1.

An interesting but unaddressed issue in the literature is whether

or not the act of spinoff is to maximize the market value of ﬁrms. In

this paper, we examine the total market-adjusted value of the com-

bined ﬁrm the spinoff. To adjust for the market trend, we also report

this total value relative to the total market capitalization of the Hong

Kong stock market. The calculated market capitalization ratios of 14

companies before and after spinning off are reported in Table 2.