CEO's characteristics and value creation from corporate spin‐offs

• Published date: 01 July 2023
• Author: Soohyung Kim,Yeosong Yoon
• Date: 01 July 2023
• DOI: http://doi.org/10.1002/jcaf.22620

Received:  December Accepted:  January 

DOI: ./jcaf.

RESEARCH ARTICLE

CEO’s characteristics and value creation from corporate

spin-offs

Soohyung Kim1Yeosong Yoon2

Sykes College of Business, University of

Tamp a, Tampa , Flori da, USA

Harbert College of Business, Auburn

University, Auburn, Alabama, USA

Correspondence

Soohyung Kim, Sykes College of Business,

University of Tampa, Tampa,FL ,

USA.

Email: sokim@ut.edu

Abstract

An important corporate spin-off procedure is forming the spun-off unit’s man-

agement team by a parent firm, especially the selection of the spun-off unit CEO.

Using  completed spin-offs with announcement and execution dates between

 and , we investigate whether the financial expertise of spun-off unit

CEOs is an essential determinant of post-spin-off performance other than

spun-off unit CEOs’ other observable characteristics, including their general

managerial skills. We find that the abnormal announcement returns for appoint-

ing financial expert CEOs at spun-off units are between . and . percentage

points larger than those generated for appointing non-financial expert CEOs.

Furthermore, spun-off unit CEOs with financial expertise significantly improve

spin-off firms’ access to external capital resources and subsequent operating per-

formance. Overall, we conclude that spun-off unit CEOs’ financial expertise is a

critical determinant of the value creation of spin-off procedures. Our paper con-

tributes to a growing literature on CEOs, their characteristics, and their impact

on firm performance.

KEYWORDS

CEO appointment, spin-offs, external financing activities, CEO expertise

JEL CLASSIFICATION

G, G, G

1 INTRODUCTION

Numerous theoretical and empirical studies have recog-

nized the importance and impacts of CEOs’ heterogeneous

characteristics on corporate decisions and performance.

Specifically, various studies show the critical roles of

two types of CEOs’ characteristics in corporate finance:

generalist CEOs, whose skills are transferable across firms

and industry, and specialist CEOs,whose skills are firm-or

industry-specific (Chen et al., ; Custódio and Metzger,

; Custódio et al., ; Gounopoulos and Pham, ).

A recent trend in the corporate environment is that many

firms prefer generalist CEOs to specialist CEOs because

of generalist CEOs’ varied professional experiences and

strategic flexibility,the ability to respond to changes in the

marketplace in a timely and appropriate manner (Forbes,

). However, there arestudies indicating the important

effect of specialist CEOs on corporate policies and value,

such as improving access to the external capital resources

(Custódio and Metzger, ), enhancing post-issue

performance on IPO (Gounopoulos and Pham, ), and

increasing acquisition returns (Custódio and Metzger,

). Thus, the evidence about the consequence of hiring

generalist CEOs or specialist CEOs is still debatable.

This study argues and provides new evidence on

the topic that CEOs with particular expertise affect

158 ©  Wiley Periodicals LLC.J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf

KIM  YOON159

shareholders’ wealth and operating performance. More

specifically, we use the experimental setting of corporate

spinoffs, especially the appointment of spun-off unit CEOs,

to study whether the post-spin-off firm performance is

associated with the financial expertise of spun-off unit

CEOs instead of their general managerial skills. A spin-

off is a type of divestiture in which a parent firm adjusts

the spun-off unit’s ownership by distributing its shares

on a pro-rata basis to the current shareholders of the

parent firm, creating a newly independent firm with no

cash generated for either the parent or the spun-off unit.

Moreover, an important part of the spin-off process is the

formation of the spun-off unit’s management team from

scratch (i.e., “denovo” feature), including the appointment

of spun-off unit CEOs. For that reason, spin-offs provide

a unique opportunity to examine the important empiri-

cal analysis of corporate governance structures (Ahn &

Denis, ;Ahn&Walker,; Denis et al., ,

Denis et al., ).

In terms of selecting spun-off unit CEOs,parentfirms

appoint one of their executives for the spun-off unit CEOs,

referred to as a parent firm CEO hereafter. Instead, they

promote a division manager at the pre-spinoff unit to the

CEO at the spun-off unit, referred to as a division man-

ager CEO hereafter. Wruck and Wruck () study the

cross-sectional variation in restructuring top management

at spun-off units. They find that when one of the parent

firm’s executives is assigned to the CEO of the spun-off

unit (i.e., parent firm CEO), there is a significant wealth

effect at the spin-off announcement. They explain that this

occurs because compared to division manager CEOs, par-

ent firm CEOs might be governance experts or possess

more management experience, defined as general manage-

rial skills transferable across firms and industries (Becker,

; Custódio et al., ).

However,parent firms might prefer appointing financial

experts to spun-off unit CEOs to choosing one of their exec-

utives for a spun-off unit CEO (i.e., parent firm CEO) or to

promoting a division manager to a spun-off unit CEO (i.e.,

division manager CEO). The importance of the spun-off

unit CEO’s financial expertise could result from the spun-

off unit’s access to external capital markets to accelerate

its growth opportunities through spin-offs. For example,

Krishnaswami and Subramaniam () empirically show

that since spin-offs mitigate information asymmetry,a firm

with weak cash flow is more likely to engage in a spin-off

if its subsidiary has potential stand-alone growth opportu-

nities. Adding further to the finding, we ask whether the

financial expertise of spun-off unit CEOs is an important

determinant of post-spin-off performance other than spun-

off unit CEOs’ general managerial skills gathered during

executive (manager) work experience at parent firms (at

divisions).

Regarding CEOs’ financial expertise, Custódio and Met-

zger () show that financial expert CEOs actively

manage financial policies and have better access to cap-

ital markets to raise external funds even under tighter

credit market conditions. At the same time, Al-Najjar and

Al-Najjar () investigate the critical role of external

financing in driving firm growth. They find that small and

mid-size enterprises (SMEs) external financing accessibil-

ity is positively related to the firm performance because of

the limited external financing sources SMEs might face.

Accordingly, spun-off units might also experience limited

access to external capital markets because of their small

asset size, which is only % of their parent firms, shown

in panel B of Table , and their high risk and high infor-

mation asymmetry as newly public firms (Iliev and Lowry,

). Thus, we hypothesize that financial expert CEOs

at spun-off units facilitate capital market access for the

units by utilizing their in-depth understanding of external

financing opportunities, thus improving post-spin-off firm

performance.

We test the hypothesis by examining the abnormal

returns on spin-off announcements and changes in exter-

nal financing and operating cash flows based on CEO

characteristics between the financial expert CEOs and

parent firm CEOs or division manager CEOs at spun-off

units. Specifically, the spin-off announcement of appoint-

ing financial experts to the spun-off unit CEO should

result in a positive market reaction if investors expect

financial expert CEOs at spun-off units to improve access

to external financing resources and enhance the operat-

ing performance of the spun-off units. Additionally, the

considerable growth in external financing following spin-

offs should be mainly attributable to spun-off units with

financial expert CEOs, improving the post-spinoff firm’s

operating performance. In our study, there are a total of

 completed spin-offs with announcement and execu-

tion dates from  to , and the spun-off unit CEOs

are classified as financial experts if the CEO had served

as a director on the audit committee or in a financial

institution before the spin-off announcement or had prior

financial industry experience for current or past employ-

ment in financial firms (SIC –) in  years before

the spin-offs (Fracassi and Tate, ; Güner et al., ).

We find that the choice of spun-off unit CEOs explains a

great deal of cross-sectional variation in the stock market

reaction to spin-off announcements. When parent firms

announce the appointment of financial experts to spun-

off unit CEOs, the abnormal announcement returns are

between . and . percentage points larger than those

generated by non-financial expert CEOs. Moreover, our

regression analyses show that the stock market reaction to

appointing spun-off unit CEOs with financial expertise is

positive and statistically significant even after controlling