Spin-offs: Accounting and Financial Issues Across the Literature

Spin-offs: Accounting and Financial Issues Across the Literature Patrick Navatte, Guillaume Schier In Accounting Auditing Control Volume 23, Issue 1, 2017, 2017 pages 97 to 125 Publishers Association Francophone de Comptabilité © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Article available online at https://www.cairn-int.info/revue-accounting-auditing-control-2017-1-page-97.htm Discovering the outline of this issue, following the journal by email, subscribing... Click on this QR Code to access the page of this issue on Cairn.info. Electronic distribution Cairn.info for Association Francophone de Comptabilité. Reproducing this article (including by photocopying) is only authorized in accordance with the general terms and conditions of use for the website, or with the general terms and conditions of the license held by your institution, where applicable. Any other reproduction, in full or in part, or storage in a database, in any form and by any means whatsoever is strictly prohibited without the prior written consent of the publisher, except where permitted under French law. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) ISSN 1262-2788 ISBN 9791093449098 © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Spin-offs: Accounting and financial issues across the literature Spin-offs : Enjeux comptables et financiers à travers la littérature Patrick NAVATTE* and Guillaume SCHIER** Abstract Résumé Spin-offs involve a separation of part of the initiator’s business, and appear to have multiple motivations from an accounting and financial point of view. The parent company separates from one of its divisions, whose stock is then listed on the market. The parent company may take the opportunity to meticulously prepare the flotation by managing the pre-transaction earnings of the spun-off firm. It may also use the transaction as a management tool to reduce its diversification discount on the market, or as a means of value creation. In addition to assessing the existing accounting and financial literature on spin-offs, this L’opération de spin-off s’apparente à une scission partielle, et s’analyse comme une stratégie à multiples détentes d’un point de vue comptable et financier. La maison mère se sépare de l’une de ses activités, dont les actions vont être introduites sur le marché. C’est l’occasion pour elle de préparer minutieusement l’opération du point de vue de la gestion des résultats comptables de la société scindée. Mais c’est aussi éventuellement pour elle la possibilité d’utiliser le spin-off comme instrument de gestion de sa décote boursière due à sa diversification, et comme outil de création de valeur. En plus d’un point sur la littérature comptable et financière relative aux spin-offs, * Professor at IGR/IAE de Rennes, Membre of CREM UMR CNRS 6211 ** Professor of Finance, ESSCA School of Management C OMPTABILITÉ – C ONTRÔLE – A UDIT [English Version] / Volume 23/1 – April 2017 I © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE received in december 2013 / accepted in december 2015 by Charles Piot Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE paper proposes a general model that offers an integrated vision of the spin-off process, which is necessary but currently lacking from existing research. Keywords: spin-off – earnings management – fair value – corporate refocusing – real earnings management – event studies – corporate governance. un modèle général propose une vision intégrée des processus de spin-off qui est nécessaire et manquante actuellement. MOTS CLÉS : SPIN-OFF, – MANAGEMENT – – MANAGEMENT RÉEL DU RÉSULTAT COMPTABLE – ÉTUDES D’ÉVÉNEMENT – GOUVERNANCE D’ENTREPRISE. DU RÉSULTAT COMPTABLE JUSTE VALEUR RECENTRAGE DES ACTIVITÉS DE LA FIRME © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Correspondence: Patrick Navatte IGR/IAE de Rennes Université de Rennes 1 11 rue jean Macé 35000 Rennes patrick.navatte@univ-rennes1.fr Acknowledgements: The authors would like to thank the CREM, the IGR-IAE Rennes, and the ESSCA School of Management for their support and the funding provided for this study. We also thank Caroline Tahar and Lionel Touchais for their advice and suggestions. Finally, we specifically wish to express our gratitude to the editor Charles Piot and the anonymous reviewers for their valuable comments and for the ongoing support that we received throughout the revision process. Their generosity and their pertinent suggestions were highly appreciated. Any remaining errors are, of course, our own. Guillaume Schier ESSCA School of Management 1 Rue Joseph Lakanal, 49000 Angers guillaume.schier@yahoo.fr Introduction The growing success of spin-offs reflects the difficulties that companies face in convincing investors of their true value and growth potential. When a specific division is separated from the rest of a diversified group’s activities and floated on the market, the visibility of the assets concerned will improve (Habib et al. 1997), and the new entity will be obliged to generate the resources it needs to finance its own growth (Gertner et al. 2002). By refocusing on its core activities, the parent company, the initiator of the transaction, can streamline its management (Gilson et al. 2001), put an end to difficult investment policy negotiations, or even reduce its risk. Several major spin-off transactions stand out in France and in Europe in the period since 2006, such as the Arkéma (chemicals division) split from Total; the demerger of Edenred from Accor in 2010; and the Aperam (stainless steel business) spin-off from ArcelorMittal in 2011. These spin-offs, © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) II © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) which create legally independent recipient companies, involve huge asset transfers as well as the reallocation of significant liabilities. Spin-offs therefore appear to have multiple motivations. They are part of a strategic process that includes accounting aspects as well as financial and governance considerations. Beyond firms’ immediate desire to steer the scope of their operations towards higher value added activities, spin-offs can provide an opportunity to undertake earnings management prior to announcing the flotation of the spun-off company’s shares. They also enable the parent company to generate more value from its assets via a simplified structure and greater transparency. Serious governance effects therefore arise. The newly spun-off company needs to appoint a new CEO and put in place a new board of directors, and the strength of the remaining connection between the parent company and the spin-off must be defined in agreement with the parent company’s shareholders. Clearly, a new approach to earnings management could potentially be taken after the transaction. The aim of our study is therefore to use a global model to better understand the procedural aspects of spin-offs and to highlight these aspects via an analysis of the literature and several examples. From an accounting point of view, these transactions affect the scope of consolidation of the groups that create these new companies, without immediately changing their shareholder base. The spin-off transaction may result in an increase in equity for the initiator: because the assets and liabilities transferred are valued at fair value, their valuation is often different from their carrying value. In addition, we can question the medium-term impact of this process of deconsolidating assets or subsidiaries (Xu et al. 2007). Does it lead to a smoothing of future profits or a reduction in risk? What specific reporting practices should the company adopt for these transactions in order to communicate effectively with shareholders and lenders (application of IFRS 5 on “Non-current Assets Held for Sale and Discontinued Operations”, and pro forma accounts)? Finally, how do these transactions affect debt ratios (Dittmar 2004) and can companies hope for improved accounting earnings? The first part of this article endeavors to answer these questions and comes to a fairly positive conclusion in terms of the potential window-dressing effect inherent in spin-off transactions. From a financial point of view, if risk is reduced and profits are maintained or even increased in the firms created in the spin-off then value should be created. We can therefore examine the financial markets to verify that abnormal positive returns materialize when the transactions are announced (Ahn and Walker 2007). In this case, spin-offs meticulously prepared from an accounting perspective are good news for shareholders. Many short-term stock market studies have been performed, while some take a longer-term focus. The second section of this article shows a fairly strong consensus in terms of the positive results obtained by spin-offs. We conclude that value is created, even if there appear to be several differences between the American and European examples. The third section proposes a general model that can be used to better understand the spin-off process. For each stage of the process, we identify the existing knowledge and the gaps in understanding for the different aspects of these transactions. This section also highlights the static and partial nature of the studies performed on the individual stages of the process and proposes adopting a more integrated vision of spin-off processes, which would provide an innovative and much needed view of the subject, currently missing from existing research. With this perspective in mind, we suggest several avenues for future research. III © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE IV 1. The accounting challenges of spin-off transactions Stolowy and Breton (2003) assign two main goals to the management of accounting data: altering the variation in earnings per share, and modifying the debt-to-equity ratio. In a similar vein, after having presented the mechanics of a spin-off transaction, its impact on accounting indicators, and the related earnings management challenges, we address the theme of financial structures, before finishing with the informational challenges posed by this type of transaction. The mechanics of spin-off transactions © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) A spin-off transaction is one potential method of divestiture available to firms (Chen and Guo 2005) alongside a simple asset sell-off, or the partial stock market flotation of a division or subsidiary (equity carve-out). Figure 1 presents these different approaches. A spin-off appears similar to a split-off transaction, but is nonetheless different. The transaction is generally performed in two stages. The first involves a partial contribution of assets to an existing or newly created subsidiary. In the second stage, shares in the subsidiary are allocated to the shareholders of the group’s parent company. This last stage takes the legal form of a distribution of dividends. In France, the transaction is generally tax neutral subject to acceptance of a request for approval.1 Figure 1 The three main methods of divestiture Shareholders A Opening situation 100% Company A 1. Decision to divest Company B 100% 2. Choice of divestiture method Company B Sale Carve‐out Shareholders A Shareholders A 100% Company A Spin‐off Shareholders A 100% Company A X% 100% cash Shareholders B Y% Y% Company A X% cash Shareholders B 100% Company B Company B (flotation of company B on the stock market) Company B (flotation of company B on the stock market) © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 1.1. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) The two transactions (the partial contribution and the distribution of dividends), although separate, are analyzed as one and the same transaction. Thus, in return for the transfer of assets, the recipient company needs to allocate all of its issued and fully paid shares to the shareholders of the transferring company. In the case of Aperam, the ArcelorMittal board meeting authorizing the transaction took place on December 7, 2010. The shareholders’ extraordinary general meetings were held on January 25, 2011, and the new Aperam shares were then issued and allocated to the ArcelorMittal shareholders in proportion to their holding. Following this allocation of shares, the ArcelorMittal shareholders were directly considered to be shareholders in Aperam’s registers. On January 31, 2011, after approval from the market authorities, the Aperam shares were jointly floated (float equal to 55% of shares) on three NYSE Euronext exchanges—Paris, Amsterdam, and Luxembourg— at a price of €27.32. The operation was successful, with the stock gaining more than 3% in the session. We note that the Mittal family held 40.8% of Aperam’s shares when the company was floated. A “total” spin-off (when 100% of the shares issued are distributed), is a deconsolidating transaction as the assets and liabilities transferred are completely removed from the scope of consolidation. This was the case for Aperam. This type of transaction can be used to redraw and tighten the boundaries of the parent company, and to create a new company with its own governance while making the management of accounting data more flexible. IFRS 10 “Consolidated Financial Statements” is applicable in the European Union for accounting periods beginning on or after January 1, 2014. There is now a focus on analyzing the notion of control from a financial perspective. In practice, a transaction is only deconsolidating if control or significant influence is no longer exerted. In addition, the term “partial” spin-off is used when part of the subsidiary’s shares are retained by the parent company. A partial spin-off transaction is therefore not necessarily deconsolidating. All of these transactions appear to have a positive effect on the accounting performance of the firms examined. 1.2. The impact of spin-offs on accounting performance indicators The results of the key studies are presented in Table 1. The vast majority of American studies suggest a post-transaction improvement in operating performance for the parent company in focusincreasing spin-offs. This is in line with the tenets of agency theory whereby simplified structures lead to more efficient operational management, with negative synergies being eliminated: the more focus-increasing the transaction, the better the company’s performance. These results are not, however, completely confirmed by the studies of Murray (2008) or Boreiko and Murgia (2013), which were performed in a European context. Unlike the results obtained on the American market, these authors find that operating performance only improves in the newly spun-off entity, and not in the parent company post-spin-off. Furthermore, Boreiko and Murgia (2013) observe that improvements in efficiency mainly occur in spin-offs of divisions created from scratch by the parent company, even in the absence of refocusing; and that no additional gain is recorded for spinoffs involved in subsequent mergers or acquisitions, which contradicts the results of the American studies. V © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE VI Table 1 Operating performance observed pre- and post-spin-off Sample and study period Main performance measures employed Key results © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Woo, Willard, and Daellenbach (1992) 51 spin-offs in the period 1972-1986. (United States) Return on assets (profitability) Market-to-book ratio Change in sales Operating performance of spin-offs does not improve after the spin-off transaction. After 3 years, 55% of spin-offs see their profitability fall, while 49% experience lower rates of sales growth. Cusatis, Miles, and Woolridge (1993) 161 spin-offs between 1965 and 1990 (United States) Variation in sales Operating earnings Changes in net capital expenditure Total assets Operating performance relatively mediocre pre-spin-off. Improvement in operating performance post-transaction, both for the parent company and the spun-off company. Daley, Mehrotra, and Sivakumar (1997) 85 spin-offs between 1975 and 1991 (United States) Return on assets (profitability) Changes in net capital expenditures Ratio of capital expenditures to assets Improvement in overall operating performance, particularly for the parent company; but non-focusincreasing transactions do not appear to lead to improved performance. Anslinger, Klepper, and Subramaniam (1999) Not specified (United States) Revenue growth Return on invested capital (ROIC) The average ROIC for spin-offs rose from 7.4% (at time of issue) to 12.9% two years after restructuring. The spin-off’s revenue growth was 9% in the two years after restructuring, compared to the S&P average of 7%. Desai and Jain (1999) 155 spin-offs between 1975 and 1991 (United States) Operating cash flow/ Total assets Improvement in operating performance post-spin-off with a higher increase for focus-increasing transactions. Murray (2008) 60 spin-offs between 1992 and 2004 (UK) Operating profit margin (operating profit/net sales) Pre-tax profit margin (pre-tax profit/sales) Turnover to assets employed ratio (sales/ assets employed) The parent company’s past performance (pre-spin-off) across the three criteria is inferior to that of comparable companies. The relative performance of spin-offs post-transaction is negative for the first two criteria and non-significant for the third. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Authors © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Chemmanur and Debarshi (2009) 196 spin-offs between 1980 and 2000 (United States) Total factor productivity Past performance of factories in the spin-off is superior to that of the factories retained by the parent company. Improvement in productivity of factories in the initiating company post-spin-off. Greater improvement in the event of subsequent acquisition (likewise for factories in the spin-off). Boreiko and Murgia (2013) 97 transactions between 1989 and 2005 (Europe) Operating cash flow/ Total assets (i.e. ROA) Operating cash flow/ Total sales (i.e. ROS) No improvement in parent company performance post-spin-off. Performance improvements in spun-off companies. This is more pronounced when the business activities were initially developed internally (rather than acquired via mergers and acquisitions) and are in the same field as the parent company’s business. In the end, although the American studies conclude that the accounting performance of both the initiating company and the spun-off company improves, in a European setting only the newly created entity appears to benefit from any significant improvement in performance. These accounting earnings should be analyzed in detail given the interest shown in this indicator by analysts and the press. 1.3. Spin-offs and earnings management Accounting earnings are particularly scrutinized by the financial world, so it might be tempting for companies to manipulate this indicator, for example if they need to raise money on the financial markets in the near future. As a spin-off involves restructuring the group’s activities, it can provide an opportunity for the spun-off company to manage its earnings, and can also be a tool for real earnings management in the initiating company. We provide the Accor-Edenred and Aperam restructurings as examples (see examples N°1, N°2). 1.3.1. THE DIFFERENT APPROACHES TO EARNINGS MANAGEMENT Although accounting information is governed by accounting standards, managers nevertheless have some leeway in their accounting and measurement choices. This room for maneuver, as Mard and Marsat (2009) put it, can lead to what is commonly referred to as “earnings management”. There are numerous reasons for this practice. Watts and Zimmerman (1986), founders of the politico-contract theory of accounting, suggest that this earnings management can be thought of as an instrument VII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE VIII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) enabling agents to maximize their utility under the constraint of bounded rationality. They observe that it may be triggered by pressure from shareholders or creditors (respect of covenants). Earnings management may also be explained by a specific context, for example a planned public offering, a future flotation, a delisting (Martinez and Serve 2011), or a change in management (Jeanjean 2001). A desire to reduce perceived risk might also lead the company to smooth its reported earnings, which could also occur with a spin-off. To prepare to float the new entity’s shares on the market, the company might use accruals to manage earnings, for example. On the whole, discretionary choices tend to involve accruals (Teoh et al. 1998). Managers may also make decisions in the normal course of the company’s business that significantly affect accounting earnings. For example, they may decide to reduce research and development costs or advertising and sales promotion expenses, or to anticipate or delay asset sales, with the objective of significantly influencing their published earnings. This behavior is referred to as “real earnings management”. Xu et al. (2007) conclude that the timing of investment decisions and funding activity is decided with this perspective in mind. Hermann et al. (2003) and Bartov (1993) find that firms sell certain assets at the precise moment when the realized gains will enable them to meet analysts’ forecast earnings estimates, or to comply with the earnings constraints imposed by covenants in the company’s existing loan agreements. Barton (2001) also reports that certain firms use derivative assets to hedge against market fluctuations (exchange rate, commodities, etc.) in order to reduce the volatility of their earnings at the end of the financial reporting period. Finally, Hand et al. (1990) note that firms may use debt deconsolidation as an earnings management tool. Gunny (2005) observes that firms that are not able to significantly increase their accruals will try to reduce their selling, general, and administrative expenses (SG&A) as much as possible. To a certain extent, these two methods of earnings management may be substitutes for one another as shown by Cohen et al. (2008), particularly since real earnings management appears to be harder to detect. 1.3.2. SPIN-OFFS: AN EARNINGS MANAGEMENT ENVIRONMENT Spin-offs involve a partial demerger for the initial entity and the flotation of the spun-off entity’s shares on the market, as well as deconsolidation (in general), and new governance. It is therefore likely that the transaction will be prepared in minute detail, that its timing will not be chosen at random, and that the structure of the new entity will be chosen in such a way that the financial market will react favorably to the announcement of the transaction. Earnings management in the initiating company IFRIC Interpretation 17 addresses “Distributions of Non-cash Assets to Owners”. It therefore applies to spin-off transactions, which are analyzed as a specific distribution of the spun-off company’s shares in the form of dividends to the shareholders of the parent company. The dividend, comprising the subsidiary company’s shares (the spun-off entity), should accordingly be accounted for at fair value at the date it was approved by the competent authority (the shareholders’ general meeting). To balance this accounting entry, the group’s equity (reserves) is reduced by the same amount. At the effective dividend distribution date, the transferring company records a gain within © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE IX earnings. The gain recognized equals the difference between the fair value of the dividend and the (consolidated) net book value of the assets and liabilities transferred (Giordano-Spring and Lacroix 2007). Overall, the transferring company’s equity varies by the amount of the (consolidated) net book value transferred. The advantage of the spin-off is that the realized gain can boost earnings, enabling the company to achieve the threshold forecast by financial analysts. The transferring company may therefore use the transaction to “manage its accounting image”, as shown in the AccorEdenred case (see example N°1). © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Accor used this approach in 2010 to increase its equity via the Edenred spin-off. The Accor group recognized a liability of €2,937 million on June 29, 2010 (Combined Ordinary and Extraordinary Meeting) representing the fair value of the newly created Edenred shares. At the payment date, July 2, 2010, Accor derecognized the consolidated assets and liabilities relating to the newly created shares, representing a net negative amount of €1,181 million (consolidated net book value). The gain was thus €4,118 million. Once the shares had been distributed, the liability of €2,937 million was cancelled, and equity increased by €1,181 million (€4,118M - €2,937M), i.e. the consolidated net book value of the assets and liabilities involved in the spin-off. Source: Annual Report and Accounts Real earnings management can also be undertaken with a view to reducing earnings volatility, although it is not clear that firms that smooth their earnings have a lower market risk (beta coefficient) or a lower cost of equity (Stolowy and Breton, 2003). The parent company may also want to benefit from the transaction on the financial markets. ArcelorMittal thus saw a reduction in its market discount, with its stock benefiting from the group’s more transparent manufacturing structure, its refocused activities, and the gain realized on the transferred assets. In the period from November 2010 to January 2011, the ArcelorMittal stock price rose by 22% (from €23 to €28), while the CAC40 index rose by only 5% over the same period. In fact, as Nixon et al. (2000) note, spin-offs are often undertaken by highly diversified firms when the operating earnings of the divisions or subsidiaries in question are weak, with the resulting demerger improving the image of the parent company’s accounts. These transactions also appear to help improve the forecasting of the parent company’s future earnings. Earnings management in the spun-off entity Pre-spin-off earnings management is fully compatible with attempts to generate greater value from the spun-off entity’s activities on the market when floating the stock (see Example N°2: ArcelorMittalAperam). © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Example N°1 Accor-Edenred Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE X Example N°2 ArcelorMittal-Aperam This transaction undoubtedly involves active “upward” management of Aperam’s earnings in 2010 to prepare the listing of the company’s shares. The table below shows Aperam’s accounting figures, with the spin-off occurring in January 2011. Aperam earnings (€ millions) Year 2009 2010 2011 2012 2013 Net income/loss -150 +105 -59 -111 -99 © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) In addition, it could be argued that once a new management team has been appointed in the spin-off, a new phase of active earnings management will take place to reassure investors of the team’s abilities. Effectively, as Mard and Marsat (2009) show in a French context, with a new management team and a new governance structure, there may be “upwards” earnings management immediately after the spin-off, given that the new company head has to prove his or her worth. In the same vein, Missionier-Piera and Ben-Amar (2007) examine companies targeted by friendly takeovers in Switzerland (downwards earnings management of the target before the takeover to facilitate the transaction). Martinez and Serve (2011) study companies that want to delist (downwards earnings management to minimize the offer price). Clearly, in our case, the spun-off company will try to actively manage its earnings upwards to make the new entity more attractive to external investors. The spin-off could therefore create more value because of the information generated during the transaction, despite IFRS 8 already requiring disclosure of information on an operating segment basis. 1.4. Spin-offs: a way of managing the company’s financial structure The specific characteristics of a spin-off transaction (transfer of assets and liabilities) and the considerable autonomy delegated to management teams when structuring the transaction also create conditions conducive to the management of accounting data (Xu et al. 2007), in particular equity and the liabilities of the initiating and spun-off entities. Mehrotra et al. (2003) examine differences in financial leverage post-spin-off. Their tests take into account past financing choices of the parent company and the cost of adjusting the capital structure towards a “target” ratio. They note that firms with a higher financial leverage post-spin-off have a higher return on assets, a higher proportion of fixed assets, and lower earnings variability. Dittmar (2004) observes that the new structures generally have a leverage ratio lower or equal to that © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) The only year the company made a profit was in 2010, just before the transaction. We can therefore assume that active earnings management took place. Source: Aperam Annual Reports and Accounts Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XI of the parent company, but comparable to that of other firms in the industry sector. Example N°2, ArcelorMittal-Aperam (continued), confirms this tendency. Example N°2 ArcelorMittal-Aperam (continued) The Aperam and ArcelorMittal debt-to-equity ratios (total debt/total equity) are as follows: Year 2010 2011 2012 Aperam 1.01 0.80 0.852 ArcelorMittal 0.845 0.87 0.905 © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) According to Dittmar (2004), the growth opportunities available to the newly created entity appear to be the main determinant of the level of debt retained. Murray (2008) studies the consequences of spin-off transactions in a European environment, where financing via bank debt is more significant than in the United States. The author uses a sample of 60 spin-offs performed in the United Kingdom between 1992 and 2004 to show that parent companies’ median debt levels are not significantly affected after the transaction. Overall, parent companies do not appear to benefit from the opportunity afforded by these transactions to offload a significant part of their own debt, but instead try to provide the spun-off companies with financial structures adapted to their development plans in accordance with the practices of their industry sector. 1.5. The informational challenges of spin-offs Because they affect the structure of the group, spin-offs significantly modify the informational environment of both the parent company and the new entity. We also note that these transactions now involve specific reporting obligations; although, as a result, they often reduce information asymmetries. 1.5.1. ADAPTED REPORTING INFORMATION In accordance with IFRS 5, the initiating group must announce its intention to discontinue certain activities (assets and liabilities for which disposal is highly probable) in financial year t-1, with the actual transaction then taking place in financial year t. Accordingly, all of the assets and liabilities related to the sale must be considered as non-current assets, or as a disposal group, held for sale. These assets and liabilities are then disclosed in specific line items at the bottom of the assets, and the liabilities and shareholders’ equity sides of the balance sheet under the respective headings: assets held for sale and liabilities held for sale. In the income statement, the group should separately disclose © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Aperam and ArcelorMittal debt-to-equity ratios Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XII income from continuing operations and income from discontinued operations. Related income and expense items are separately disclosed under the heading “income from discontinued operations” and a specific income statement for these activities is published in the notes to the accounts. Similarly, the group must also specify the net cash flows attributable to the operating, investing, and financing activities of the discontinued activities. We also note the requirement to provide pro forma information to investors to enable them to understand the impact the transaction would have made on the prior year financial statements if it had taken place in a previous accounting period. This should enable the user of the accounts to make comparisons in order to better understand the future prospects of the transaction. From this point of view, it is regrettable that so few research studies have examined whether these pro forma accounts are genuinely informative for the investor (Bhattacharya et al. 2003). REDUCING INFORMATION ASYMMETRIES THROUGH THIS TYPE OF TRANSACTION © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) We note the justification for the Aperam transaction given by Lakshmi N. Mittal before the extraordinary general meeting of shareholders. “Stainless steel [...] has been competing within ArcelorMittal for capital allocation against the core strategic areas of focus for the ArcelorMittal group, which are mining division expansion and carbon steel growth projects in the emerging markets. Furthermore, the stainless division does not receive the attention it merits from the financial markets as it is part of the wider ArcelorMittal group and represents only 5% of group EBITDA. Pure-play stainless steel companies have generally traded at a premium in the market compared to […] diversified steel companies. I therefore believe that an independent stainless company would be in a better position to attract […] capital […]. Ultimately, I believe it will result in a more equitable valuation for the stainless business.” (Letter from Lakshmi N. Mittal to shareholders before the extraordinary general meeting of January 25, 2011, www.aperam.com). Thus the potential information asymmetry for external investors would disappear, since the cash flows generated by Aperam are now directly observable and no longer “buried” within the ArcelorMittal accounts; although this should be kept in perspective in the context of IFRS 8. Because of this, the market discount attributed to conglomerates should theoretically decrease, as was the case for ArcelorMittal. This is in keeping with the literature (Hoechle et al. 2012), but has not been explicitly studied for a significant sample of spin-offs. Overall, these transactions are meticulously prepared from an accounting point of view (realized gains, active earnings management, deconsolidation structure, breach of thresholds, desire to reduce overall group risk), which facilitates financial statement management—a topic until present rarely examined in the literature. These transactions also offer value-generating potential on the financial markets. 2. The financial challenges of spin-offs Spin-offs can therefore be analyzed as a process. The pre-transaction management of accounting earnings may potentially improve the valuation of the spun-off company’s assets on the market. In addition, by simplifying its structure post-spin-off, the parent company may be able to reduce the discount applied by the market to diversified firms. Finally, improved efficiency may generate longer-term © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 1.5.2. Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XIII gains. After reviewing the different financial motivations for the spin-off process, we present the results of the various short- and medium-term studies performed on the subject. We then highlight several limitations of these analyses. 2.1. The purpose of this type of transaction There are numerous financial motivations for these transactions. First of all, spin-offs may be considered as a disciplinary procedure imposed by the market as a whole to force the parent company to improve its performance. The spin-off could also be motivated by the ambitions of management driven by the stock-option-related remuneration offered by this type of transaction. In addition, better coverage of the group’s various activities by financial market analysts may also significantly increase the value of the parent company’s shares as well as those of the newly spun-off entity. Finally, the increased focus afforded by the transaction should improve the efficiency of the firms involved, and lead to an increase in their stock market value.2 SPIN-OFFS: A SUBSTITUTE FOR MARKET DISCIPLINE © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Chemmanur and Yan (2004) stress that prior to the transaction, threats of a takeover bid or a securities exchange offer may have weighed on the parent company, and induced it to dispose of certain activities. In fact, pressure exerted by all external parties (Ahn and Walker 2007) may positively influence the decision to carry out a spin-off and to restructure the firm’s activities via a demerger. Berger and Ofek (1999) show that managers essentially enter into focus-increasing transactions because they are pressured by a disciplinary event such as a takeover bid, new shareholder activism (for example, Accor-Endenred), or the collapse of their stock price (Jain 1985), which was the case for ArcelorMittal pre-spin-off. In general, according to Boreiko and Murgia (2013) this type of decision may also be taken following a change in governance, such as the arrival of a new CEO. These factors may lead to better operational performance down the line and an improved stock price. New merger and acquisition activity may also take place. Seward and Walsh (1996) note that new remuneration methods for managers such as performancebased shares or stock options provide compelling reasons for managers to carry out these transactions. In addition, Aron (1991) has theoretically shown that these incentive-based contracts could improve performance; while Schipper and Smith (1983) emphasize that spin-offs may be an effective way of controlling managers and of reducing the agency costs arising from potential conflicts of interest between shareholders and managers. Boreiko and Murgia (2013) use logistic regressions to estimate the probability of this type of transaction occurring in a European context and find that spin-offs are often triggered by control efforts deployed by the market as a whole (change in CEO or takeover threat). 2.1.2. SPIN-OFFS AND COVERAGE OF THE FIRM’S ACTIVITIES BY EXTERNAL ANALYSTS By splitting the firm’s activities into two new entities, the transaction may improve the transparency of the information provided by each entity. On this point, Nanda and Narayanan (1999) suggest that it may facilitate market placements for future securities issues. In addition, Krishnaswami and © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 2.1.1. Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XIV Subramaniam (1999) consider that the future earnings forecasts prepared by financial analysts will be improved, which is confirmed by the Gilson et al. (2001) study. SPIN-OFFS AND THE REDUCTION IN NEGATIVE SYNERGIES © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Comment and Jarrell (1995) posit that focus-increasing spin-offs should create more value and improve overall efficiency by removing the negative synergies that may exist between divisions. Desai and Jain (1999) confirm this opinion and observe significantly higher abnormal returns for stocks in the short term when the spin-off transactions are strongly focus-increasing. They also note that the operational gains generated after the transaction are likely to be higher. In the same vein, Gertner et al. (2002) examine behavioral changes in investment policy following a spin-off. Their results show that, post-transaction, the new entities’ investment activity is sensitive to their operating profits, but not before (the division’s pre-transaction investment is positively related to parent company profits). These results are consistent with an improvement in capital allocation achieved via spin-offs, and confirm the findings of Scharfstein and Stein (2000) and Colak and Whited (2007). It could be claimed, as per Biddle et al. (2009), that greater transparency will make firms’ investment activities more efficient by reducing under- or overinvestment. We could therefore observe that in most restructurings (securitization, merger, etc.), although the accounting aspects are linked and significant, they are often merely considered to be a necessary lever for achieving the primary—financial—objective. 2.2. Spin-offs: a value-creating transaction The majority of studies are performed in a short-term American context (event study) based on the semi-strong form market efficiency hypothesis. We will comment on the few results obtained in a European environment, and will also present studies performed over a longer-term horizon (generally three years). 2.2.1. RESULTS OF SHORT-TERM STUDIES The short-term analyses performed on the American market over the last thirty years concur on two fundamental results. The first is that value creation is inherent to spin-off transactions. The second is that this value creation is strengthened when the transaction is focus-increasing for the parent company. Table 2 presents a summary of 32 studies (29 of which relate to the United States) showing a positive cumulative average abnormal return of 3% to 5% for the parent company when a spin-off is announced. Several control variables are used in these studies, specifically the regulatory motivations of certain transactions (Schipper and Smith 1983), their size, and the related focus-increasing effects. As expected, larger spin-off transactions (in terms of the proportion of the firm’s initial assets that are spun-off) are associated with more significant value creation (Hite and Owers 1983; Miles and Rosenfeld 1983). Aside from the focus-increasing aspect, other studies have examined different financial determinants in an attempt to explain the value creation observed. By improving transparency, spin-off transactions increase the quality of the information collected by capital providers, and reduce the discount on these groups’ shares (Gilson et al. 2001) while also improving capital allocation (Scharfstein and Stein 2000). © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 2.1.3. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Table 2 Abnormal returns observed on the announcement of a spin-off Spin-offs (full sample) Focus-increasing spin-offs Study period Event window Sample size CAR t-stat % positive Sample size CAR t-stat Hite and Owers (1983) USA 1963-1981 (-1;0) 123 3.30% 1% 59% 29 1.40% 1% Miles and Rosenfeld (1983) USA 1963-1980 (0;1) 55 3.34% 1% Schipper and Smith (1983) USA 1963-1981 (-1; 0) 93 2.84% 1% Rosenfeld (1984) USA 1963-1981 (-1;0) 35 5.56% 1% Copeland, Lemgruber, and Mayers (1987) USA 1962-1982 (-1;0) 188 3.03% Denning (1988) USA 1970-1982 (-6;6) 42 2.58% Seifert and Rubin (1989) USA 1968-1983 (-1;0) 51 3.26% 1% 71% Ball, Rutherford, and Shaw (1993) USA 1968-1990 (-1; 0) 39 3.20% 5% 79% 1% 63% 47 5.42% 1% % positive Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Geo. Region Authors 62% Vijh (1994) USA 1964-1990 (-1;0) 113 2.90% Johnson, Brown, and Johnson (1994) USA 1980-1991 (-1;0) 113 3.42% Allen, Lummer, McConnel, and Reed (1995) USA 1962-1991 (-1;0) 94 2.15% 1% 73% Slovin, Sushka, and Ferrao (1995) USA 1980-1991 (0;1) 37 1.32% 5% 72% Michaely and Shaw (1995) USA 1981-1988 (-2;+2) 9 4.46% 10% 67% Johnson, Klein, and Thibodeaux (1996) USA 1975-1988 (-1;0) 104 3.96% 1% 73% 81% XV © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) XVI USA 1972-1987 (-1;0) 78 2.60% 1% Daley, Mehrotra, and Sivakumar (1997) USA 1975-1991 (-1;0) 85 3.40% 1% Desai and Jain (1999) USA 1975-1991 (-1;1) 144 3.84% 1% Krishnaswami and Subramaniam (1999) USA 1978-1993 (-1;0) 118 3.15% 1% Mulherin and Boone (2000) USA 1990-1999 (-1;1) 106 4.51% 1% Gertner, Powers, and Scharfstein (2002) USA 1981-1996 (-1;0) 160 3.90% Chemmanur and Paeglis (2001) USA 1991-1998 (-1;0) 19 4.45% 1% Wruck and Wruck (2002) USA 1985-1995 (-1;0) 172 3.58% 1% Maxwell and Rao (2003) USA 1976-1997 (0;1) 80 3.59% 1% Ahn and Denis (2004) USA 1981-1996 (-1;1) 150 4.03% Ahn and Walker (2007) USA 1981-1997 (-1;0)) 102 3.16% Veld and VeldMerkoulova (2008) USA 1995-2002 (-1;1) 91 3.07% 1% Chemmanur, Jordan, Liu and Wu (2010) USA 1990-2000 (-1;+1) 139 2.19% 1% McNeil and Moore (2005) USA 1980-1996 (-1;+1) 152 3.53% 1% (-1;1) 772 2.80% 1% Rüdisüli (2005) EU/USA 1990-2003 68% 60 4.30% 1% 71% 103 4.45% 1% 73% 88 3.59% 69% 90 4.20% 64 4.22% 1% 106 3.29% 10% 443 3.50% 1% 73 3.57% 1% 61 5.70% 1% 84% 75% 71% 72% Veld and VeldMerkoulova (2004) EU 1987-2000 (-1;1) 108 2.66% 1% 61% Qian (2006) EU 1987-2005 (-1;1) 157 4.82% 1% 73% Boreiko and Murgia (2013) EU 1989-2005 (-1;1) 97 4.80% 1% 65% Note: CAR = Cumulative Abnormal Return © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 78% Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Seward and Walsh (1996) 62% Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XVII However, to our knowledge, no stock market study has examined spin-offs in terms of preventing over- or underinvestment behavior, or their effects from this point of view. Of course, if the parent company is potentially undervalued, this provides a powerful motive for performing such a transaction, as the two new entities could benefit from it, not only in terms of valuation (Krishnaswami and Subramaniam 1999), but also in terms of more frequent and significant recourse to capital markets. Authors Cusatis, Miles, and Woolridge (1993) Geographic region Study period Event window USA 19651990 T to T+36 months © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Firm Sample size Average abnormal return Combined 141 13.90% Initiator 131 18.10% Spin-off 146 33.60%** Michaely and Shaw (1995) USA 19811988 T to T+24 months Spin-off 30 -59.13% Desai and Jain (1999) USA 19751991 T to T+36 months Combined 155 19.80%*** Initiator 155 15.20% Spin-off 155 32.30%*** 96 5.10% McConnel, Ozbilgin, and Wahal (2001) Kirchmaier (2003) Veld and Veld-Merkoulova (2004) Boreiko and Murgia (2013) USA 19891995 T to T+36 months Initiator Spin-off 96 -20.90% Europe 19891999 T to T+36 months Combined 34 4.20% Initiator 34 -5.90% Spin-off 41 17.30%* Combined 45 2% Initiator 68 -0.40% Spin-off 53 15.20% Initiator 97 19.6%** Spin-off 97 53.6%** Europe Europe 19872000 19892005 T to T+36 months T to T+36 months *, ** and ***: statistically significant at the 10%, 5%, and 1% level, respectively. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Table 3 Long-term abnormal returns observed following a spin-off Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XVIII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 2.2.2. RESULTS OF LONG-TERM STUDIES Table 3 presents the results of the main studies examining the long-term value creation potential of spin-off transactions. There are far fewer compared to studies of short-term value creation. Although certain studies observe statistically significant, positive long-term value creation for the spun-off company (Desai and Jain 1999 or Cusatis et al. 1993), the figures for the initiating companies are less convincing. Cusatis et al. (1993) find that in the United States, long-term value creation for a spin-off is positively linked to the spin-off being involved in a merger or acquisition post-transaction. In a European setting, the results are positive for the parent-spin-off combination and the spunoff companies, but mixed for the initiating firms, as shown by Kirchmaier (2003) and Veld and Veld-Merkoulova (2004). In addition, the European spin-offs studied by Boreiko and Murgia (2013) appear to be triggered by governance changes, such as the recruitment of a new CEO, or the existence of an external takeover threat (Chemmanur et al. 2010). In addition, the transactions are larger than those undertaken in the United States. The firms that carry out these transactions are also considerably more diversified than the companies in the control sample. Overall, we note the methodological challenges of this type of analysis, including those flagged by Fama (1998), and the difficulty of obtaining statistically significant results compared to studies focusing on short-term analysis. 2.3. The limitations of the analyses presented Applied to spin-offs, event analysis methodology has the benefit of proposing a precise measure of value creation (destruction). It is also based on “robust” methodology developed by Fama et al. (1969) and improved by the “enhanced” market model of Fama and French (1992). But beyond the difficulties involved in identifying the effective announcement date of the transaction, this method fails to take into account the dynamic aspects of the process, and instead freezes the results at the announcement date. However, the announcement of this type of transaction is followed by a complex sequence of events. Several authors have already cataloged significant effects after the announcement date, in © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) As far as we are aware, very few studies have been performed on spin-offs in Europe, with the exception of Veld and Veld-Merkoulova (2004), Qian (2006), and Boreiko and Murgia (2013). They all support the existence of value creation. We firstly note that there have been fewer spin-offs in continental Europe than in the United States, the United Kingdom, and Northern Europe, and that there is perhaps a lack of data. The Boreiko and Murgia (2013) study examines 97 cases across 12 European countries (analysis period: 1989-2005). The authors emphasize the spin-off’s importance as a mechanism for correcting previous errors. The study separates spin-offs of prior acquisitions from the demerger of internally generated divisions, and undermines certain results taken for granted in the American studies. Thus the focus-increasing nature of the transaction may not be at the heart of the stock market success of certain spin-offs, which may instead arise because the business was previously acquired via an only moderately successful merger or acquisition (Aperam, for example, which was acquired during the merger of Mittal with Arcelor). As such, the market may appreciate the correction of this initial error. This analysis is supported by the fact that no difference in abnormal stock market performance is recognized for transactions involving divisions created by internal growth, irrespective of whether the transaction is focus-increasing or not. Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XIX particular on the spin-off ex date (Vijh 1994). Spin-offs actually involve a continuum of procedures designed to restructure the firm’s activities, starting before the announcement date and continuing afterwards: setting up the new entity’s management team, adopting specific governance, successfully carrying out the transaction, floating the shares on the market, and finally, a transition period for the new relationship between the parent company and its former subsidiary or division. Several similar studies of mergers and acquisitions have already shown the usefulness of combining methodologies to better understand the origins of the value creation phenomenon (Bruner 1999). Understanding spin-offs: propositions for a global procedural model and avenues for research © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Spin-offs are complex transactions that can be used to redefine firms’ boundaries. Although these long-term transactions can be structured in numerous ways, the vast majority of studies focus on a single stage in the process (the announcement), and barely examine the dynamic aspect of these transactions. In this section we offer an integrated vision of the spin-off process, which we believe to be necessary to both identify gaps in the literature and to propose new avenues for research. We thus propose a model that jointly analyzes the accounting and financial challenges of spin-offs, allowing us to position them within a procedural approach by dynamically articulating the determinants, motivations, structuring choices, and consequences of these transactions (Figure 2). The determinants and the motivations for spin-offs (3.1) appear to be more complex, linking financial motivations (related to reducing the diversification discount) and accounting motivations (management of the initiator’s accounting image, in particular). Furthermore, the structuring choices made (3.2) (in terms of the assets and liabilities transferred, as well as in terms of governance, or independence from the parent company) have a medium-term scope, and play an important mediating role in the value creation process. Finally, these transactions have multiple consequences (3.3) in terms of operating performance, risk, reduction in asymmetries, improvement of internal and external governance mechanisms, and ultimately shareholder value creation. 3.1. The determinants and motivations of spin-off transactions Spin-off transactions appear to be determined by disciplinary events (❶) relating to a specific institutional and strategic context (❷). Although many authors acknowledge the importance of disciplinary events (takeover threats) as trigger factors for spin-offs, relatively few studies examine the institutional and strategic context, despite the recent study of Boreiko and Murgia (2013) highlighting, in a European context, that the origin of the spun-off entity is one of the most significant explanatory factors for the value creation observed. In this respect, changes in governance prior to the transaction also appear to influence future choices (Ahn and Walker 2007). Shareholder activism may also play a significant role in terms of the determinants for this type of transaction. The arrival of one or more powerful investment funds, accustomed to working with the press, as shareholders of the Accor group may have substantially modified the group’s governance and objectives. The Eurazéo and Colony funds, for instance, took a significant, albeit minority, holding in Accor (30%). These new © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 3. XX © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) shareholders then insisted on a marked change in the company’s strategy, which eventually led to the spin-off. In terms of motivating factors, the first financial aim is to reduce the diversification discount of the stock, as the spin-off will be considered to be the opposite of a diversification. The initiating company, which suffers from the inherent stock market discount applied to most diversified companies (Hoechle et al. 2012), may hope that the spin-off will reduce this discount. From this point of view, improved managerial discipline (❸) was one of the first motivations to be studied (Schipper and Smith 1983). The spin-off transaction also provides an opportunity to generate more value from the assets of the spun-off company, and to hire a new CEO, or even a new management team, in the spin-off. It can also be the moment to renegotiate management incentives in order to obtain strong results, and to set new objectives for management (Aron 1991). The reduction in negative synergies (❹) forms part of this type of motivation (Comment and Jarrel 1993). According to these authors, this reduction involves improving the efficiency of the investment policy by refocusing and abandoning cross-funding practices. The improved visibility of spun-off companies, together with better coverage by financial analysts (❺) further strengthens the financial motivation. The spin-off transaction and the resulting improvements in the transparency of the accounts may reduce the diversification discount, and it may also be possible to prepare more precise forecasts of the initiating company’s future earnings. The second motivation is accounting based and relates to managing the earnings of the two demerged entities, as discussed earlier. Although we have previously emphasized (Section 1) that spinoff transactions create a favorable environment for earnings management, few studies have examined this topic. To our knowledge, the Lin and Yung (2014) study, which shows the pre-spin-off existence and frequency of accruals-based earnings management in an American context (❻), is the only work to address this issue. On the other hand, we found no studies at all examining real earnings management (manipulation of real transactions/activities), although the characteristics of spin-off transactions lend themselves to this behavior (❼). Research should be performed to fill this gap, preferably in a European context. We also note that the financial and accounting motivations are not necessarily independent. By way of example, Biddle et al. (2009) highlight that better quality accounting information is linked to a reduction in under- or overinvestment, as confirmed by André et al. (2014). Spin-offs may therefore provide a means of controlling the risk of over- or underinvestment by providing more relevant accounting information. 3.2. Structuring choices for the spin-off Spin-offs potentially cover different scenarios: partial or total spin-off; removal or not from the scope of consolidation; or the existence, or otherwise, of links between the parent and the subsidiary posttransaction. It may therefore be useful to perform a detailed study of the way in which assets and liabilities are reorganized during the spin-off, as indicated in Figure 2. The scope chosen for the transaction is a determining factor (❽). The Total-Arkéma (2006) transaction apparently required two years of preparation. In addition to the choice of assets and liabilities to be © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Figure 2 Procedural analysis of a spin-off transaction Determinants of the transaction (Jain 1985; Berger and Ofek 1999; Chemmanur and Yan 2004) Reduction in diversification discount ❸ Improved managerial discipline (replacement of management teams, improved incentive mechanisms, etc.) (Schipper and Smith 1983; Aron 1991; Seward and Walsh 1996; Boreiko and Murgia 2013) ❹ Reduction in negative synergies (refocused activities, improved capital allocation, error correction, etc.) (Comment and Jarrel 1995; Desai and Jain 1999; Gertner et al. 2002; Colak and Whited 2007) ❺ Improved visibility and clarity of spun‐off entities ❷ Strategic and shareholder context (origin of spin‐off, shareholder activism, change in governance, etc.) (Allen et al. 1995; Ahn and Walker 2007; Boreiko and Murgia 2013) (Habib et al. 1997; Gilson et al. 2001) Earnings management ❻ Accruals‐based earnings management (upwards management, valuation of spin‐off, etc.) (Lin and Yung 2014) ❼ Real earnings management (improvement in accounting image, achieving results/parent company thresholds, etc.) (no studies identified) Structuring choices for the transaction (methods) Consequences of the transaction (desired outcomes) ❽ Choice of assets transferred and allocation of debts (reorganization of assets and liabilities) ⓬ Improved operational performance (parent company/spin‐off) (Mehrotra et al. 2003; Dittmar 2004; Murray 2008) (Woo et al. 1992; Cusatis et al. 1993; Daley et al. 1997; Desai and Jain 1999; Murray 2008; Chemmanur and Debarshi 2009) ❾ Accounting choices (total or partial spin‐off, deconsolidation, choices relating to earnings management in the spin‐off) (no studies identified) ⓭ Modified level of risk (spin‐off) (Vijh 1994; Huson and Mackinnon 2003) ❿ Choice of governance methods (floating the stock on the market, selecting the CEO, composition of the Board of Directors, remuneration system, anti‐takeover measures, etc.) ⓮ Reduced information asymmetry (parent company/spin‐off) (Vijh 1994; Wruck and Wruck 2002; Qian 2006; Klein and Rosenfeld 2010; Chemmanur et al. 2010) (Krishnaswami and Subramaniam 1999; Veld and Veld‐Merkoulova 2008) ⓫ Choices relating to post‐ transaction relationship between the parent company and the spin‐off (percentage holding retained, overlapping Boards of Directors, industrial and commercial relationships) ⓯ Improved internal/external governance mechanisms (parent company/spin‐off) (Cusatis et al. 1993; Seward and Walsh 1996; Pyo 2007) ⓰ Shareholder value creation (in the short and medium term) (see Table 2 and Table 3) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE ❶ Disciplinary events (deterioration in performance, collapse in share price, takeover threats, etc.) Motivations for the transaction (Semadeni and Cannela 2011) XXI © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) XXII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) transferred into the spun-off entity, Arkéma’s viability also needed to be assured, in other words its ability to make a profit and its financial equilibrium (i.e. its debt levels and growth prospects). Clearly, the group had to disclose appropriate information in the period t-1 (IFRS 5). As suggested in the literature (Dittmar, 2004), companies do not appear to use these transactions to reduce their debt ratios, possibly because of the inherent constraints of valuing entities created via an IPO (Initial Public Offering). Organizing the preparation of the transaction is another key concern (❾), although to our knowledge no academic study has specifically addressed this topic. We consider that the accounting choices made in a spin-off merit further examination. For example, how can prior losses, if any, be cleared in the spin-off (“big bath” strategy)? During this type of transaction, a new CEO will be appointed in the spun-off entity. Mard and Marsat (2009), for instance, focus on the period around the appointment of a new CEO and confirm a rupture in accounting choices: the new CEO of the spun-off company may want to ensure future earnings growth, for example. Research should therefore be undertaken (DeFond 2010) to better determine the “actual quality” of the gains disclosed in companies’ financial reporting during and after the spin-off. Governance decisions also appear to affect the future earnings achieved (❿). Unlike the previous point, there is an abundant literature on the topic which shows, for example, that the origin of the spun-off entity’s management team affects the implementation of potential anti-OPA measures (Chemmanur et al. 2010) and the composition of the board of directors. Other characteristics of the governance system also play a role in this respect. Firstly, because of the number of independent directors that it contains, the structure of the board of directors may influence the decisions made by the CEO (Peasnell et al. 2005). The auditors, specialized boards and committees, and financial analysts are therefore able to influence the management of accounting data, its extent, and its processes. Piot and Janin (2007), for example, show the impact of the audit committee on earnings management. The degree of independence between the parent company and the spin-off post-transaction (Semadani and Cannela 2011) also needs to be taken into account, as does the increase, or otherwise, in capital undertaken by the spin-off around the effective demerger date and reserved for new blocks of shareholders (Klein and Rosenfeld 2010). Finally, we note that although the spin-off splits the initial group in two, the two entities may remain linked post-transaction (⓫). The remaining links can take numerous forms (overlapping boards of directors, retention of a residual holding, commercial relationship, etc.). As far as we are aware, only one study (Semadeni and Cannela 2011) explicitly examines these links, despite the transaction structure potentially affecting the independence of the spin-off. From this point of view, it would therefore be useful to construct a synthetic indicator of independence. We note that there are numerous ways of structuring these transactions, and that the method selected will influence the actual value created. The procedural approach proposed therefore allows us to better identify the value creation potential by introducing a series of individual mediating variables to better account for the diversity of the transactions and their consequences. 3.3. The consequences of the transaction and value creation The ultimate goal is to generate more value from the assets of the spun-off company and the initiating firm. We have identified four consequences of spin-off transactions, linked to value creation (⓰): © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) improved operational performance (⓬), a modified level of risk (⓭), reduced information asymmetry (⓮), and improved internal and external governance mechanisms (⓯). In terms of the level of risk (⓭), the spin-off essentially reduces the group’s diversification and weakens the ability of the spun-off entity to repay its debts as it no longer benefits from the protection of the parent company. The spun-off company is expected to repay its debts solely by means of its own cash flows. In addition, the variability of the spun-off company’s cash flows is potentially greater than that of the initial group because its business is less diversified. The default risk of the spun-off company therefore rises, and its rating is likely to fall. Conversely, in terms of information asymmetries (⓮), we should see a positive value creation effect as each entity’s results will be easier for investors to understand, although the impact of the spin-off on information asymmetry would benefit from being better documented, particularly in a European context. Similarly, the consequences of spin-off transactions on the governance structures of the two entities are poorly understood (⓯). Additional research studies are therefore necessary, from a post-transaction, market control point of view and in relation to the internal governance mechanisms of the two entities. Without a doubt, the value creation (⓰) and improved operational performance (⓬) consequences have inspired the majority of existing research studies, although without generating strong added value, since these studies are generally static and focused on a single stage in the process. In fact, looking at the stock market studies (32 short-term studies and seven long-term studies: see Tables 2 and 3), which form around half of our cited references, we can’t help but be struck by their standardization. Firstly, virtually all of these studies focus on the announcement of the spin-off to the market, without precisely identifying the determinants or motivations for the transaction. The temporal dynamic is ignored, as is the decision chain that led to the transaction, with all aspects of governance generally being overlooked. To our knowledge, unlike mergers (Bruner, 1999), there are no published case studies of spin-offs, which is a serious deficiency. We strongly recommend this topic as an avenue for research: “the anatomy” of a spin-off transaction performed by combining accounting and financial knowledge and strategic and governance considerations, as value creation arises from all of these factors. In the same vein, using a statistically sufficient sample size to analyze the reduction in the initiating company’s market discount, rather than solely measuring cumulative abnormal returns, would be a welcome addition to the literature. This type of research appears to be totally lacking. In addition, although a significant number of studies of post-spin-off operational performance have been performed (eight studies cited, two of which were in a European context, see Table 1), we learn relatively little about the mechanisms and the transmission channels via which these transactions create value. We therefore suggest an alternative avenue for research. Studies need to be prepared in which the transaction samples are much more highly “conditioned”, even if they are smaller in size, so that we can learn more from them. Effectively, attempting to examine spin-offs without other precisions (is the transaction focus-increasing or not, is there a change of CEO or not, is the relative size of the spin-off significant or not, is there total commercial and industrial independence vis-à-vis the parent company or not, etc.) brings strong unobservable heterogeneity to the model data (omitted variables). In order to isolate the impact of the spin-off on the results, the Heckman procedure could be used. This procedure aims to correct for selection bias, since firms carrying out spin-offs may have singular characteristics compared to other firms. Endogeneity may also generate an inverse causality issue. In our case, we could ask whether the spin-off influences performance, or vice versa. Finally, XXIII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XXIV panel data econometrics and tools such as the generalized method of moments may be useful in this context. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) In 2010, annual total spin-off transactions reached $54 billion, and this amount more than doubled in 2011. These transactions play a significant role in group restructuring flows. On average, spin-offs create shareholder value in the United States. When the transactions are larger, they are more likely to be focus-increasing, and higher value creation will be observed. We also note the quasi-disciplinary character of these transactions, with many spin-offs being carried out following a performance setback or a weakened financial situation. In addition, when smaller firms are floated on the market, the likelihood of them being acquired at a later date increases. This could generate a double gain for the shareholder, firstly by incentivizing managers’ performance and, secondly, the more uncertain gain of an acquisition premium if the firm is subsequently purchased. From an accounting point of view, we firstly note the challenge of potential pre-transaction earnings management of the activities to be split from the group (on which the success of the stock market listing depends), and of earnings management in the initiating company in an attempt to achieve a threshold (related to financial analysts’ forecasts) or to smooth earnings. Other significant challenges are the risk of opportunistic management of the scope of consolidation, and the use of “fair value” to value contributions. Overall, many research contributions remain to be written on this topic, as identified in the present article by means of a global procedural model. By highlighting the different determinants and motivations, the diverse ways of structuring these transactions, and their consequences, this model identifies certain gaps in the literature. Thus in Europe, for example, no studies have analyzed pre-transaction earnings management, or the choices that led to a total spin-off being favored over a partial transaction. Future dynamic and multivariate studies (panel data econometrics) would do well to examine the European context, and to analyze the parent company accounts preand post-transaction, without forgetting the path taken by the newly spun-off entity. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) Conclusion Notes © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.211.207.47) 1. In the United States, spin-offs are tax neutral (Frank and Harden, 2001), provided that the parent company distributes at least 80% of the shares of its subsidiary (cf. Section 355 of the United States Internal Revenue Code). According to Huyett and Koller (2011), the tax aspect of these transactions should not, however, be ignored since it goes some way to explaining why firms choose to spin-off divisions rather than sell them, particularly when the accounting gain is significant. 2. 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Spin-offs: Accounting and Financial Issues Across the Literature Patrick Navatte, Guillaume Schier In Accounting Auditing Control Volume 23, Issue 1, 2017, 2017 pages 97 to 125 Publishers Association Francophone de Comptabilité © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Article available online at https://www.cairn-int.info/revue-accounting-auditing-control-2017-1-page-97.htm Discovering the outline of this issue, following the journal by email, subscribing... Click on this QR Code to access the page of this issue on Cairn.info. Electronic distribution Cairn.info for Association Francophone de Comptabilité. Reproducing this article (including by photocopying) is only authorized in accordance with the general terms and conditions of use for the website, or with the general terms and conditions of the license held by your institution, where applicable. Any other reproduction, in full or in part, or storage in a database, in any form and by any means whatsoever is strictly prohibited without the prior written consent of the publisher, except where permitted under French law. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) ISSN 1262-2788 ISBN 9791093449098 © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Spin-offs: Accounting and financial issues across the literature Spin-offs : Enjeux comptables et financiers à travers la littérature Patrick NAVATTE* and Guillaume SCHIER** Abstract Résumé Spin-offs involve a separation of part of the initiator’s business, and appear to have multiple motivations from an accounting and financial point of view. The parent company separates from one of its divisions, whose stock is then listed on the market. The parent company may take the opportunity to meticulously prepare the flotation by managing the pre-transaction earnings of the spun-off firm. It may also use the transaction as a management tool to reduce its diversification discount on the market, or as a means of value creation. In addition to assessing the existing accounting and financial literature on spin-offs, this L’opération de spin-off s’apparente à une scission partielle, et s’analyse comme une stratégie à multiples détentes d’un point de vue comptable et financier. La maison mère se sépare de l’une de ses activités, dont les actions vont être introduites sur le marché. C’est l’occasion pour elle de préparer minutieusement l’opération du point de vue de la gestion des résultats comptables de la société scindée. Mais c’est aussi éventuellement pour elle la possibilité d’utiliser le spin-off comme instrument de gestion de sa décote boursière due à sa diversification, et comme outil de création de valeur. En plus d’un point sur la littérature comptable et financière relative aux spin-offs, * Professor at IGR/IAE de Rennes, Membre of CREM UMR CNRS 6211 ** Professor of Finance, ESSCA School of Management C OMPTABILITÉ – C ONTRÔLE – A UDIT [English Version] / Volume 23/1 – April 2017 I © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE received in december 2013 / accepted in december 2015 by Charles Piot Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE paper proposes a general model that offers an integrated vision of the spin-off process, which is necessary but currently lacking from existing research. Keywords: spin-off – earnings management – fair value – corporate refocusing – real earnings management – event studies – corporate governance. un modèle général propose une vision intégrée des processus de spin-off qui est nécessaire et manquante actuellement. MOTS CLÉS : SPIN-OFF, – MANAGEMENT – – MANAGEMENT RÉEL DU RÉSULTAT COMPTABLE – ÉTUDES D’ÉVÉNEMENT – GOUVERNANCE D’ENTREPRISE. DU RÉSULTAT COMPTABLE JUSTE VALEUR RECENTRAGE DES ACTIVITÉS DE LA FIRME © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Correspondence: Patrick Navatte IGR/IAE de Rennes Université de Rennes 1 11 rue jean Macé 35000 Rennes patrick.navatte@univ-rennes1.fr Acknowledgements: The authors would like to thank the CREM, the IGR-IAE Rennes, and the ESSCA School of Management for their support and the funding provided for this study. We also thank Caroline Tahar and Lionel Touchais for their advice and suggestions. Finally, we specifically wish to express our gratitude to the editor Charles Piot and the anonymous reviewers for their valuable comments and for the ongoing support that we received throughout the revision process. Their generosity and their pertinent suggestions were highly appreciated. Any remaining errors are, of course, our own. Guillaume Schier ESSCA School of Management 1 Rue Joseph Lakanal, 49000 Angers guillaume.schier@yahoo.fr Introduction The growing success of spin-offs reflects the difficulties that companies face in convincing investors of their true value and growth potential. When a specific division is separated from the rest of a diversified group’s activities and floated on the market, the visibility of the assets concerned will improve (Habib et al. 1997), and the new entity will be obliged to generate the resources it needs to finance its own growth (Gertner et al. 2002). By refocusing on its core activities, the parent company, the initiator of the transaction, can streamline its management (Gilson et al. 2001), put an end to difficult investment policy negotiations, or even reduce its risk. Several major spin-off transactions stand out in France and in Europe in the period since 2006, such as the Arkéma (chemicals division) split from Total; the demerger of Edenred from Accor in 2010; and the Aperam (stainless steel business) spin-off from ArcelorMittal in 2011. These spin-offs, © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) II © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) which create legally independent recipient companies, involve huge asset transfers as well as the reallocation of significant liabilities. Spin-offs therefore appear to have multiple motivations. They are part of a strategic process that includes accounting aspects as well as financial and governance considerations. Beyond firms’ immediate desire to steer the scope of their operations towards higher value added activities, spin-offs can provide an opportunity to undertake earnings management prior to announcing the flotation of the spun-off company’s shares. They also enable the parent company to generate more value from its assets via a simplified structure and greater transparency. Serious governance effects therefore arise. The newly spun-off company needs to appoint a new CEO and put in place a new board of directors, and the strength of the remaining connection between the parent company and the spin-off must be defined in agreement with the parent company’s shareholders. Clearly, a new approach to earnings management could potentially be taken after the transaction. The aim of our study is therefore to use a global model to better understand the procedural aspects of spin-offs and to highlight these aspects via an analysis of the literature and several examples. From an accounting point of view, these transactions affect the scope of consolidation of the groups that create these new companies, without immediately changing their shareholder base. The spin-off transaction may result in an increase in equity for the initiator: because the assets and liabilities transferred are valued at fair value, their valuation is often different from their carrying value. In addition, we can question the medium-term impact of this process of deconsolidating assets or subsidiaries (Xu et al. 2007). Does it lead to a smoothing of future profits or a reduction in risk? What specific reporting practices should the company adopt for these transactions in order to communicate effectively with shareholders and lenders (application of IFRS 5 on “Non-current Assets Held for Sale and Discontinued Operations”, and pro forma accounts)? Finally, how do these transactions affect debt ratios (Dittmar 2004) and can companies hope for improved accounting earnings? The first part of this article endeavors to answer these questions and comes to a fairly positive conclusion in terms of the potential window-dressing effect inherent in spin-off transactions. From a financial point of view, if risk is reduced and profits are maintained or even increased in the firms created in the spin-off then value should be created. We can therefore examine the financial markets to verify that abnormal positive returns materialize when the transactions are announced (Ahn and Walker 2007). In this case, spin-offs meticulously prepared from an accounting perspective are good news for shareholders. Many short-term stock market studies have been performed, while some take a longer-term focus. The second section of this article shows a fairly strong consensus in terms of the positive results obtained by spin-offs. We conclude that value is created, even if there appear to be several differences between the American and European examples. The third section proposes a general model that can be used to better understand the spin-off process. For each stage of the process, we identify the existing knowledge and the gaps in understanding for the different aspects of these transactions. This section also highlights the static and partial nature of the studies performed on the individual stages of the process and proposes adopting a more integrated vision of spin-off processes, which would provide an innovative and much needed view of the subject, currently missing from existing research. With this perspective in mind, we suggest several avenues for future research. III © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE IV 1. The accounting challenges of spin-off transactions Stolowy and Breton (2003) assign two main goals to the management of accounting data: altering the variation in earnings per share, and modifying the debt-to-equity ratio. In a similar vein, after having presented the mechanics of a spin-off transaction, its impact on accounting indicators, and the related earnings management challenges, we address the theme of financial structures, before finishing with the informational challenges posed by this type of transaction. The mechanics of spin-off transactions © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) A spin-off transaction is one potential method of divestiture available to firms (Chen and Guo 2005) alongside a simple asset sell-off, or the partial stock market flotation of a division or subsidiary (equity carve-out). Figure 1 presents these different approaches. A spin-off appears similar to a split-off transaction, but is nonetheless different. The transaction is generally performed in two stages. The first involves a partial contribution of assets to an existing or newly created subsidiary. In the second stage, shares in the subsidiary are allocated to the shareholders of the group’s parent company. This last stage takes the legal form of a distribution of dividends. In France, the transaction is generally tax neutral subject to acceptance of a request for approval.1 Figure 1 The three main methods of divestiture Shareholders A Opening situation 100% Company A 1. Decision to divest Company B 100% 2. Choice of divestiture method Company B Sale Carve‐out Shareholders A Shareholders A 100% Company A Spin‐off Shareholders A 100% Company A X% 100% cash Shareholders B Y% Y% Company A X% cash Shareholders B 100% Company B Company B (flotation of company B on the stock market) Company B (flotation of company B on the stock market) © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 1.1. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) The two transactions (the partial contribution and the distribution of dividends), although separate, are analyzed as one and the same transaction. Thus, in return for the transfer of assets, the recipient company needs to allocate all of its issued and fully paid shares to the shareholders of the transferring company. In the case of Aperam, the ArcelorMittal board meeting authorizing the transaction took place on December 7, 2010. The shareholders’ extraordinary general meetings were held on January 25, 2011, and the new Aperam shares were then issued and allocated to the ArcelorMittal shareholders in proportion to their holding. Following this allocation of shares, the ArcelorMittal shareholders were directly considered to be shareholders in Aperam’s registers. On January 31, 2011, after approval from the market authorities, the Aperam shares were jointly floated (float equal to 55% of shares) on three NYSE Euronext exchanges—Paris, Amsterdam, and Luxembourg— at a price of €27.32. The operation was successful, with the stock gaining more than 3% in the session. We note that the Mittal family held 40.8% of Aperam’s shares when the company was floated. A “total” spin-off (when 100% of the shares issued are distributed), is a deconsolidating transaction as the assets and liabilities transferred are completely removed from the scope of consolidation. This was the case for Aperam. This type of transaction can be used to redraw and tighten the boundaries of the parent company, and to create a new company with its own governance while making the management of accounting data more flexible. IFRS 10 “Consolidated Financial Statements” is applicable in the European Union for accounting periods beginning on or after January 1, 2014. There is now a focus on analyzing the notion of control from a financial perspective. In practice, a transaction is only deconsolidating if control or significant influence is no longer exerted. In addition, the term “partial” spin-off is used when part of the subsidiary’s shares are retained by the parent company. A partial spin-off transaction is therefore not necessarily deconsolidating. All of these transactions appear to have a positive effect on the accounting performance of the firms examined. 1.2. The impact of spin-offs on accounting performance indicators The results of the key studies are presented in Table 1. The vast majority of American studies suggest a post-transaction improvement in operating performance for the parent company in focusincreasing spin-offs. This is in line with the tenets of agency theory whereby simplified structures lead to more efficient operational management, with negative synergies being eliminated: the more focus-increasing the transaction, the better the company’s performance. These results are not, however, completely confirmed by the studies of Murray (2008) or Boreiko and Murgia (2013), which were performed in a European context. Unlike the results obtained on the American market, these authors find that operating performance only improves in the newly spun-off entity, and not in the parent company post-spin-off. Furthermore, Boreiko and Murgia (2013) observe that improvements in efficiency mainly occur in spin-offs of divisions created from scratch by the parent company, even in the absence of refocusing; and that no additional gain is recorded for spinoffs involved in subsequent mergers or acquisitions, which contradicts the results of the American studies. V © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE VI Table 1 Operating performance observed pre- and post-spin-off Sample and study period Main performance measures employed Key results © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Woo, Willard, and Daellenbach (1992) 51 spin-offs in the period 1972-1986. (United States) Return on assets (profitability) Market-to-book ratio Change in sales Operating performance of spin-offs does not improve after the spin-off transaction. After 3 years, 55% of spin-offs see their profitability fall, while 49% experience lower rates of sales growth. Cusatis, Miles, and Woolridge (1993) 161 spin-offs between 1965 and 1990 (United States) Variation in sales Operating earnings Changes in net capital expenditure Total assets Operating performance relatively mediocre pre-spin-off. Improvement in operating performance post-transaction, both for the parent company and the spun-off company. Daley, Mehrotra, and Sivakumar (1997) 85 spin-offs between 1975 and 1991 (United States) Return on assets (profitability) Changes in net capital expenditures Ratio of capital expenditures to assets Improvement in overall operating performance, particularly for the parent company; but non-focusincreasing transactions do not appear to lead to improved performance. Anslinger, Klepper, and Subramaniam (1999) Not specified (United States) Revenue growth Return on invested capital (ROIC) The average ROIC for spin-offs rose from 7.4% (at time of issue) to 12.9% two years after restructuring. The spin-off’s revenue growth was 9% in the two years after restructuring, compared to the S&P average of 7%. Desai and Jain (1999) 155 spin-offs between 1975 and 1991 (United States) Operating cash flow/ Total assets Improvement in operating performance post-spin-off with a higher increase for focus-increasing transactions. Murray (2008) 60 spin-offs between 1992 and 2004 (UK) Operating profit margin (operating profit/net sales) Pre-tax profit margin (pre-tax profit/sales) Turnover to assets employed ratio (sales/ assets employed) The parent company’s past performance (pre-spin-off) across the three criteria is inferior to that of comparable companies. The relative performance of spin-offs post-transaction is negative for the first two criteria and non-significant for the third. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Authors © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Chemmanur and Debarshi (2009) 196 spin-offs between 1980 and 2000 (United States) Total factor productivity Past performance of factories in the spin-off is superior to that of the factories retained by the parent company. Improvement in productivity of factories in the initiating company post-spin-off. Greater improvement in the event of subsequent acquisition (likewise for factories in the spin-off). Boreiko and Murgia (2013) 97 transactions between 1989 and 2005 (Europe) Operating cash flow/ Total assets (i.e. ROA) Operating cash flow/ Total sales (i.e. ROS) No improvement in parent company performance post-spin-off. Performance improvements in spun-off companies. This is more pronounced when the business activities were initially developed internally (rather than acquired via mergers and acquisitions) and are in the same field as the parent company’s business. In the end, although the American studies conclude that the accounting performance of both the initiating company and the spun-off company improves, in a European setting only the newly created entity appears to benefit from any significant improvement in performance. These accounting earnings should be analyzed in detail given the interest shown in this indicator by analysts and the press. 1.3. Spin-offs and earnings management Accounting earnings are particularly scrutinized by the financial world, so it might be tempting for companies to manipulate this indicator, for example if they need to raise money on the financial markets in the near future. As a spin-off involves restructuring the group’s activities, it can provide an opportunity for the spun-off company to manage its earnings, and can also be a tool for real earnings management in the initiating company. We provide the Accor-Edenred and Aperam restructurings as examples (see examples N°1, N°2). 1.3.1. THE DIFFERENT APPROACHES TO EARNINGS MANAGEMENT Although accounting information is governed by accounting standards, managers nevertheless have some leeway in their accounting and measurement choices. This room for maneuver, as Mard and Marsat (2009) put it, can lead to what is commonly referred to as “earnings management”. There are numerous reasons for this practice. Watts and Zimmerman (1986), founders of the politico-contract theory of accounting, suggest that this earnings management can be thought of as an instrument VII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE VIII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) enabling agents to maximize their utility under the constraint of bounded rationality. They observe that it may be triggered by pressure from shareholders or creditors (respect of covenants). Earnings management may also be explained by a specific context, for example a planned public offering, a future flotation, a delisting (Martinez and Serve 2011), or a change in management (Jeanjean 2001). A desire to reduce perceived risk might also lead the company to smooth its reported earnings, which could also occur with a spin-off. To prepare to float the new entity’s shares on the market, the company might use accruals to manage earnings, for example. On the whole, discretionary choices tend to involve accruals (Teoh et al. 1998). Managers may also make decisions in the normal course of the company’s business that significantly affect accounting earnings. For example, they may decide to reduce research and development costs or advertising and sales promotion expenses, or to anticipate or delay asset sales, with the objective of significantly influencing their published earnings. This behavior is referred to as “real earnings management”. Xu et al. (2007) conclude that the timing of investment decisions and funding activity is decided with this perspective in mind. Hermann et al. (2003) and Bartov (1993) find that firms sell certain assets at the precise moment when the realized gains will enable them to meet analysts’ forecast earnings estimates, or to comply with the earnings constraints imposed by covenants in the company’s existing loan agreements. Barton (2001) also reports that certain firms use derivative assets to hedge against market fluctuations (exchange rate, commodities, etc.) in order to reduce the volatility of their earnings at the end of the financial reporting period. Finally, Hand et al. (1990) note that firms may use debt deconsolidation as an earnings management tool. Gunny (2005) observes that firms that are not able to significantly increase their accruals will try to reduce their selling, general, and administrative expenses (SG&A) as much as possible. To a certain extent, these two methods of earnings management may be substitutes for one another as shown by Cohen et al. (2008), particularly since real earnings management appears to be harder to detect. 1.3.2. SPIN-OFFS: AN EARNINGS MANAGEMENT ENVIRONMENT Spin-offs involve a partial demerger for the initial entity and the flotation of the spun-off entity’s shares on the market, as well as deconsolidation (in general), and new governance. It is therefore likely that the transaction will be prepared in minute detail, that its timing will not be chosen at random, and that the structure of the new entity will be chosen in such a way that the financial market will react favorably to the announcement of the transaction. Earnings management in the initiating company IFRIC Interpretation 17 addresses “Distributions of Non-cash Assets to Owners”. It therefore applies to spin-off transactions, which are analyzed as a specific distribution of the spun-off company’s shares in the form of dividends to the shareholders of the parent company. The dividend, comprising the subsidiary company’s shares (the spun-off entity), should accordingly be accounted for at fair value at the date it was approved by the competent authority (the shareholders’ general meeting). To balance this accounting entry, the group’s equity (reserves) is reduced by the same amount. At the effective dividend distribution date, the transferring company records a gain within © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE IX earnings. The gain recognized equals the difference between the fair value of the dividend and the (consolidated) net book value of the assets and liabilities transferred (Giordano-Spring and Lacroix 2007). Overall, the transferring company’s equity varies by the amount of the (consolidated) net book value transferred. The advantage of the spin-off is that the realized gain can boost earnings, enabling the company to achieve the threshold forecast by financial analysts. The transferring company may therefore use the transaction to “manage its accounting image”, as shown in the AccorEdenred case (see example N°1). © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Accor used this approach in 2010 to increase its equity via the Edenred spin-off. The Accor group recognized a liability of €2,937 million on June 29, 2010 (Combined Ordinary and Extraordinary Meeting) representing the fair value of the newly created Edenred shares. At the payment date, July 2, 2010, Accor derecognized the consolidated assets and liabilities relating to the newly created shares, representing a net negative amount of €1,181 million (consolidated net book value). The gain was thus €4,118 million. Once the shares had been distributed, the liability of €2,937 million was cancelled, and equity increased by €1,181 million (€4,118M - €2,937M), i.e. the consolidated net book value of the assets and liabilities involved in the spin-off. Source: Annual Report and Accounts Real earnings management can also be undertaken with a view to reducing earnings volatility, although it is not clear that firms that smooth their earnings have a lower market risk (beta coefficient) or a lower cost of equity (Stolowy and Breton, 2003). The parent company may also want to benefit from the transaction on the financial markets. ArcelorMittal thus saw a reduction in its market discount, with its stock benefiting from the group’s more transparent manufacturing structure, its refocused activities, and the gain realized on the transferred assets. In the period from November 2010 to January 2011, the ArcelorMittal stock price rose by 22% (from €23 to €28), while the CAC40 index rose by only 5% over the same period. In fact, as Nixon et al. (2000) note, spin-offs are often undertaken by highly diversified firms when the operating earnings of the divisions or subsidiaries in question are weak, with the resulting demerger improving the image of the parent company’s accounts. These transactions also appear to help improve the forecasting of the parent company’s future earnings. Earnings management in the spun-off entity Pre-spin-off earnings management is fully compatible with attempts to generate greater value from the spun-off entity’s activities on the market when floating the stock (see Example N°2: ArcelorMittalAperam). © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Example N°1 Accor-Edenred Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE X Example N°2 ArcelorMittal-Aperam This transaction undoubtedly involves active “upward” management of Aperam’s earnings in 2010 to prepare the listing of the company’s shares. The table below shows Aperam’s accounting figures, with the spin-off occurring in January 2011. Aperam earnings (€ millions) Year 2009 2010 2011 2012 2013 Net income/loss -150 +105 -59 -111 -99 © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) In addition, it could be argued that once a new management team has been appointed in the spin-off, a new phase of active earnings management will take place to reassure investors of the team’s abilities. Effectively, as Mard and Marsat (2009) show in a French context, with a new management team and a new governance structure, there may be “upwards” earnings management immediately after the spin-off, given that the new company head has to prove his or her worth. In the same vein, Missionier-Piera and Ben-Amar (2007) examine companies targeted by friendly takeovers in Switzerland (downwards earnings management of the target before the takeover to facilitate the transaction). Martinez and Serve (2011) study companies that want to delist (downwards earnings management to minimize the offer price). Clearly, in our case, the spun-off company will try to actively manage its earnings upwards to make the new entity more attractive to external investors. The spin-off could therefore create more value because of the information generated during the transaction, despite IFRS 8 already requiring disclosure of information on an operating segment basis. 1.4. Spin-offs: a way of managing the company’s financial structure The specific characteristics of a spin-off transaction (transfer of assets and liabilities) and the considerable autonomy delegated to management teams when structuring the transaction also create conditions conducive to the management of accounting data (Xu et al. 2007), in particular equity and the liabilities of the initiating and spun-off entities. Mehrotra et al. (2003) examine differences in financial leverage post-spin-off. Their tests take into account past financing choices of the parent company and the cost of adjusting the capital structure towards a “target” ratio. They note that firms with a higher financial leverage post-spin-off have a higher return on assets, a higher proportion of fixed assets, and lower earnings variability. Dittmar (2004) observes that the new structures generally have a leverage ratio lower or equal to that © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) The only year the company made a profit was in 2010, just before the transaction. We can therefore assume that active earnings management took place. Source: Aperam Annual Reports and Accounts Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XI of the parent company, but comparable to that of other firms in the industry sector. Example N°2, ArcelorMittal-Aperam (continued), confirms this tendency. Example N°2 ArcelorMittal-Aperam (continued) The Aperam and ArcelorMittal debt-to-equity ratios (total debt/total equity) are as follows: Year 2010 2011 2012 Aperam 1.01 0.80 0.852 ArcelorMittal 0.845 0.87 0.905 © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) According to Dittmar (2004), the growth opportunities available to the newly created entity appear to be the main determinant of the level of debt retained. Murray (2008) studies the consequences of spin-off transactions in a European environment, where financing via bank debt is more significant than in the United States. The author uses a sample of 60 spin-offs performed in the United Kingdom between 1992 and 2004 to show that parent companies’ median debt levels are not significantly affected after the transaction. Overall, parent companies do not appear to benefit from the opportunity afforded by these transactions to offload a significant part of their own debt, but instead try to provide the spun-off companies with financial structures adapted to their development plans in accordance with the practices of their industry sector. 1.5. The informational challenges of spin-offs Because they affect the structure of the group, spin-offs significantly modify the informational environment of both the parent company and the new entity. We also note that these transactions now involve specific reporting obligations; although, as a result, they often reduce information asymmetries. 1.5.1. ADAPTED REPORTING INFORMATION In accordance with IFRS 5, the initiating group must announce its intention to discontinue certain activities (assets and liabilities for which disposal is highly probable) in financial year t-1, with the actual transaction then taking place in financial year t. Accordingly, all of the assets and liabilities related to the sale must be considered as non-current assets, or as a disposal group, held for sale. These assets and liabilities are then disclosed in specific line items at the bottom of the assets, and the liabilities and shareholders’ equity sides of the balance sheet under the respective headings: assets held for sale and liabilities held for sale. In the income statement, the group should separately disclose © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Aperam and ArcelorMittal debt-to-equity ratios Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XII income from continuing operations and income from discontinued operations. Related income and expense items are separately disclosed under the heading “income from discontinued operations” and a specific income statement for these activities is published in the notes to the accounts. Similarly, the group must also specify the net cash flows attributable to the operating, investing, and financing activities of the discontinued activities. We also note the requirement to provide pro forma information to investors to enable them to understand the impact the transaction would have made on the prior year financial statements if it had taken place in a previous accounting period. This should enable the user of the accounts to make comparisons in order to better understand the future prospects of the transaction. From this point of view, it is regrettable that so few research studies have examined whether these pro forma accounts are genuinely informative for the investor (Bhattacharya et al. 2003). REDUCING INFORMATION ASYMMETRIES THROUGH THIS TYPE OF TRANSACTION © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) We note the justification for the Aperam transaction given by Lakshmi N. Mittal before the extraordinary general meeting of shareholders. “Stainless steel [...] has been competing within ArcelorMittal for capital allocation against the core strategic areas of focus for the ArcelorMittal group, which are mining division expansion and carbon steel growth projects in the emerging markets. Furthermore, the stainless division does not receive the attention it merits from the financial markets as it is part of the wider ArcelorMittal group and represents only 5% of group EBITDA. Pure-play stainless steel companies have generally traded at a premium in the market compared to […] diversified steel companies. I therefore believe that an independent stainless company would be in a better position to attract […] capital […]. Ultimately, I believe it will result in a more equitable valuation for the stainless business.” (Letter from Lakshmi N. Mittal to shareholders before the extraordinary general meeting of January 25, 2011, www.aperam.com). Thus the potential information asymmetry for external investors would disappear, since the cash flows generated by Aperam are now directly observable and no longer “buried” within the ArcelorMittal accounts; although this should be kept in perspective in the context of IFRS 8. Because of this, the market discount attributed to conglomerates should theoretically decrease, as was the case for ArcelorMittal. This is in keeping with the literature (Hoechle et al. 2012), but has not been explicitly studied for a significant sample of spin-offs. Overall, these transactions are meticulously prepared from an accounting point of view (realized gains, active earnings management, deconsolidation structure, breach of thresholds, desire to reduce overall group risk), which facilitates financial statement management—a topic until present rarely examined in the literature. These transactions also offer value-generating potential on the financial markets. 2. The financial challenges of spin-offs Spin-offs can therefore be analyzed as a process. The pre-transaction management of accounting earnings may potentially improve the valuation of the spun-off company’s assets on the market. In addition, by simplifying its structure post-spin-off, the parent company may be able to reduce the discount applied by the market to diversified firms. Finally, improved efficiency may generate longer-term © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 1.5.2. Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XIII gains. After reviewing the different financial motivations for the spin-off process, we present the results of the various short- and medium-term studies performed on the subject. We then highlight several limitations of these analyses. 2.1. The purpose of this type of transaction There are numerous financial motivations for these transactions. First of all, spin-offs may be considered as a disciplinary procedure imposed by the market as a whole to force the parent company to improve its performance. The spin-off could also be motivated by the ambitions of management driven by the stock-option-related remuneration offered by this type of transaction. In addition, better coverage of the group’s various activities by financial market analysts may also significantly increase the value of the parent company’s shares as well as those of the newly spun-off entity. Finally, the increased focus afforded by the transaction should improve the efficiency of the firms involved, and lead to an increase in their stock market value.2 SPIN-OFFS: A SUBSTITUTE FOR MARKET DISCIPLINE © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Chemmanur and Yan (2004) stress that prior to the transaction, threats of a takeover bid or a securities exchange offer may have weighed on the parent company, and induced it to dispose of certain activities. In fact, pressure exerted by all external parties (Ahn and Walker 2007) may positively influence the decision to carry out a spin-off and to restructure the firm’s activities via a demerger. Berger and Ofek (1999) show that managers essentially enter into focus-increasing transactions because they are pressured by a disciplinary event such as a takeover bid, new shareholder activism (for example, Accor-Endenred), or the collapse of their stock price (Jain 1985), which was the case for ArcelorMittal pre-spin-off. In general, according to Boreiko and Murgia (2013) this type of decision may also be taken following a change in governance, such as the arrival of a new CEO. These factors may lead to better operational performance down the line and an improved stock price. New merger and acquisition activity may also take place. Seward and Walsh (1996) note that new remuneration methods for managers such as performancebased shares or stock options provide compelling reasons for managers to carry out these transactions. In addition, Aron (1991) has theoretically shown that these incentive-based contracts could improve performance; while Schipper and Smith (1983) emphasize that spin-offs may be an effective way of controlling managers and of reducing the agency costs arising from potential conflicts of interest between shareholders and managers. Boreiko and Murgia (2013) use logistic regressions to estimate the probability of this type of transaction occurring in a European context and find that spin-offs are often triggered by control efforts deployed by the market as a whole (change in CEO or takeover threat). 2.1.2. SPIN-OFFS AND COVERAGE OF THE FIRM’S ACTIVITIES BY EXTERNAL ANALYSTS By splitting the firm’s activities into two new entities, the transaction may improve the transparency of the information provided by each entity. On this point, Nanda and Narayanan (1999) suggest that it may facilitate market placements for future securities issues. In addition, Krishnaswami and © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 2.1.1. Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XIV Subramaniam (1999) consider that the future earnings forecasts prepared by financial analysts will be improved, which is confirmed by the Gilson et al. (2001) study. SPIN-OFFS AND THE REDUCTION IN NEGATIVE SYNERGIES © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Comment and Jarrell (1995) posit that focus-increasing spin-offs should create more value and improve overall efficiency by removing the negative synergies that may exist between divisions. Desai and Jain (1999) confirm this opinion and observe significantly higher abnormal returns for stocks in the short term when the spin-off transactions are strongly focus-increasing. They also note that the operational gains generated after the transaction are likely to be higher. In the same vein, Gertner et al. (2002) examine behavioral changes in investment policy following a spin-off. Their results show that, post-transaction, the new entities’ investment activity is sensitive to their operating profits, but not before (the division’s pre-transaction investment is positively related to parent company profits). These results are consistent with an improvement in capital allocation achieved via spin-offs, and confirm the findings of Scharfstein and Stein (2000) and Colak and Whited (2007). It could be claimed, as per Biddle et al. (2009), that greater transparency will make firms’ investment activities more efficient by reducing under- or overinvestment. We could therefore observe that in most restructurings (securitization, merger, etc.), although the accounting aspects are linked and significant, they are often merely considered to be a necessary lever for achieving the primary—financial—objective. 2.2. Spin-offs: a value-creating transaction The majority of studies are performed in a short-term American context (event study) based on the semi-strong form market efficiency hypothesis. We will comment on the few results obtained in a European environment, and will also present studies performed over a longer-term horizon (generally three years). 2.2.1. RESULTS OF SHORT-TERM STUDIES The short-term analyses performed on the American market over the last thirty years concur on two fundamental results. The first is that value creation is inherent to spin-off transactions. The second is that this value creation is strengthened when the transaction is focus-increasing for the parent company. Table 2 presents a summary of 32 studies (29 of which relate to the United States) showing a positive cumulative average abnormal return of 3% to 5% for the parent company when a spin-off is announced. Several control variables are used in these studies, specifically the regulatory motivations of certain transactions (Schipper and Smith 1983), their size, and the related focus-increasing effects. As expected, larger spin-off transactions (in terms of the proportion of the firm’s initial assets that are spun-off) are associated with more significant value creation (Hite and Owers 1983; Miles and Rosenfeld 1983). Aside from the focus-increasing aspect, other studies have examined different financial determinants in an attempt to explain the value creation observed. By improving transparency, spin-off transactions increase the quality of the information collected by capital providers, and reduce the discount on these groups’ shares (Gilson et al. 2001) while also improving capital allocation (Scharfstein and Stein 2000). © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 2.1.3. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Table 2 Abnormal returns observed on the announcement of a spin-off Spin-offs (full sample) Focus-increasing spin-offs Study period Event window Sample size CAR t-stat % positive Sample size CAR t-stat Hite and Owers (1983) USA 1963-1981 (-1;0) 123 3.30% 1% 59% 29 1.40% 1% Miles and Rosenfeld (1983) USA 1963-1980 (0;1) 55 3.34% 1% Schipper and Smith (1983) USA 1963-1981 (-1; 0) 93 2.84% 1% Rosenfeld (1984) USA 1963-1981 (-1;0) 35 5.56% 1% Copeland, Lemgruber, and Mayers (1987) USA 1962-1982 (-1;0) 188 3.03% Denning (1988) USA 1970-1982 (-6;6) 42 2.58% Seifert and Rubin (1989) USA 1968-1983 (-1;0) 51 3.26% 1% 71% Ball, Rutherford, and Shaw (1993) USA 1968-1990 (-1; 0) 39 3.20% 5% 79% 1% 63% 47 5.42% 1% % positive Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Geo. Region Authors 62% Vijh (1994) USA 1964-1990 (-1;0) 113 2.90% Johnson, Brown, and Johnson (1994) USA 1980-1991 (-1;0) 113 3.42% Allen, Lummer, McConnel, and Reed (1995) USA 1962-1991 (-1;0) 94 2.15% 1% 73% Slovin, Sushka, and Ferrao (1995) USA 1980-1991 (0;1) 37 1.32% 5% 72% Michaely and Shaw (1995) USA 1981-1988 (-2;+2) 9 4.46% 10% 67% Johnson, Klein, and Thibodeaux (1996) USA 1975-1988 (-1;0) 104 3.96% 1% 73% 81% XV © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) XVI USA 1972-1987 (-1;0) 78 2.60% 1% Daley, Mehrotra, and Sivakumar (1997) USA 1975-1991 (-1;0) 85 3.40% 1% Desai and Jain (1999) USA 1975-1991 (-1;1) 144 3.84% 1% Krishnaswami and Subramaniam (1999) USA 1978-1993 (-1;0) 118 3.15% 1% Mulherin and Boone (2000) USA 1990-1999 (-1;1) 106 4.51% 1% Gertner, Powers, and Scharfstein (2002) USA 1981-1996 (-1;0) 160 3.90% Chemmanur and Paeglis (2001) USA 1991-1998 (-1;0) 19 4.45% 1% Wruck and Wruck (2002) USA 1985-1995 (-1;0) 172 3.58% 1% Maxwell and Rao (2003) USA 1976-1997 (0;1) 80 3.59% 1% Ahn and Denis (2004) USA 1981-1996 (-1;1) 150 4.03% Ahn and Walker (2007) USA 1981-1997 (-1;0)) 102 3.16% Veld and VeldMerkoulova (2008) USA 1995-2002 (-1;1) 91 3.07% 1% Chemmanur, Jordan, Liu and Wu (2010) USA 1990-2000 (-1;+1) 139 2.19% 1% McNeil and Moore (2005) USA 1980-1996 (-1;+1) 152 3.53% 1% (-1;1) 772 2.80% 1% Rüdisüli (2005) EU/USA 1990-2003 68% 60 4.30% 1% 71% 103 4.45% 1% 73% 88 3.59% 69% 90 4.20% 64 4.22% 1% 106 3.29% 10% 443 3.50% 1% 73 3.57% 1% 61 5.70% 1% 84% 75% 71% 72% Veld and VeldMerkoulova (2004) EU 1987-2000 (-1;1) 108 2.66% 1% 61% Qian (2006) EU 1987-2005 (-1;1) 157 4.82% 1% 73% Boreiko and Murgia (2013) EU 1989-2005 (-1;1) 97 4.80% 1% 65% Note: CAR = Cumulative Abnormal Return © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 78% Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Seward and Walsh (1996) 62% Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XVII However, to our knowledge, no stock market study has examined spin-offs in terms of preventing over- or underinvestment behavior, or their effects from this point of view. Of course, if the parent company is potentially undervalued, this provides a powerful motive for performing such a transaction, as the two new entities could benefit from it, not only in terms of valuation (Krishnaswami and Subramaniam 1999), but also in terms of more frequent and significant recourse to capital markets. Authors Cusatis, Miles, and Woolridge (1993) Geographic region Study period Event window USA 19651990 T to T+36 months © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Firm Sample size Average abnormal return Combined 141 13.90% Initiator 131 18.10% Spin-off 146 33.60%** Michaely and Shaw (1995) USA 19811988 T to T+24 months Spin-off 30 -59.13% Desai and Jain (1999) USA 19751991 T to T+36 months Combined 155 19.80%*** Initiator 155 15.20% Spin-off 155 32.30%*** 96 5.10% McConnel, Ozbilgin, and Wahal (2001) Kirchmaier (2003) Veld and Veld-Merkoulova (2004) Boreiko and Murgia (2013) USA 19891995 T to T+36 months Initiator Spin-off 96 -20.90% Europe 19891999 T to T+36 months Combined 34 4.20% Initiator 34 -5.90% Spin-off 41 17.30%* Combined 45 2% Initiator 68 -0.40% Spin-off 53 15.20% Initiator 97 19.6%** Spin-off 97 53.6%** Europe Europe 19872000 19892005 T to T+36 months T to T+36 months *, ** and ***: statistically significant at the 10%, 5%, and 1% level, respectively. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Table 3 Long-term abnormal returns observed following a spin-off Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XVIII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 2.2.2. RESULTS OF LONG-TERM STUDIES Table 3 presents the results of the main studies examining the long-term value creation potential of spin-off transactions. There are far fewer compared to studies of short-term value creation. Although certain studies observe statistically significant, positive long-term value creation for the spun-off company (Desai and Jain 1999 or Cusatis et al. 1993), the figures for the initiating companies are less convincing. Cusatis et al. (1993) find that in the United States, long-term value creation for a spin-off is positively linked to the spin-off being involved in a merger or acquisition post-transaction. In a European setting, the results are positive for the parent-spin-off combination and the spunoff companies, but mixed for the initiating firms, as shown by Kirchmaier (2003) and Veld and Veld-Merkoulova (2004). In addition, the European spin-offs studied by Boreiko and Murgia (2013) appear to be triggered by governance changes, such as the recruitment of a new CEO, or the existence of an external takeover threat (Chemmanur et al. 2010). In addition, the transactions are larger than those undertaken in the United States. The firms that carry out these transactions are also considerably more diversified than the companies in the control sample. Overall, we note the methodological challenges of this type of analysis, including those flagged by Fama (1998), and the difficulty of obtaining statistically significant results compared to studies focusing on short-term analysis. 2.3. The limitations of the analyses presented Applied to spin-offs, event analysis methodology has the benefit of proposing a precise measure of value creation (destruction). It is also based on “robust” methodology developed by Fama et al. (1969) and improved by the “enhanced” market model of Fama and French (1992). But beyond the difficulties involved in identifying the effective announcement date of the transaction, this method fails to take into account the dynamic aspects of the process, and instead freezes the results at the announcement date. However, the announcement of this type of transaction is followed by a complex sequence of events. Several authors have already cataloged significant effects after the announcement date, in © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) As far as we are aware, very few studies have been performed on spin-offs in Europe, with the exception of Veld and Veld-Merkoulova (2004), Qian (2006), and Boreiko and Murgia (2013). They all support the existence of value creation. We firstly note that there have been fewer spin-offs in continental Europe than in the United States, the United Kingdom, and Northern Europe, and that there is perhaps a lack of data. The Boreiko and Murgia (2013) study examines 97 cases across 12 European countries (analysis period: 1989-2005). The authors emphasize the spin-off’s importance as a mechanism for correcting previous errors. The study separates spin-offs of prior acquisitions from the demerger of internally generated divisions, and undermines certain results taken for granted in the American studies. Thus the focus-increasing nature of the transaction may not be at the heart of the stock market success of certain spin-offs, which may instead arise because the business was previously acquired via an only moderately successful merger or acquisition (Aperam, for example, which was acquired during the merger of Mittal with Arcelor). As such, the market may appreciate the correction of this initial error. This analysis is supported by the fact that no difference in abnormal stock market performance is recognized for transactions involving divisions created by internal growth, irrespective of whether the transaction is focus-increasing or not. Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XIX particular on the spin-off ex date (Vijh 1994). Spin-offs actually involve a continuum of procedures designed to restructure the firm’s activities, starting before the announcement date and continuing afterwards: setting up the new entity’s management team, adopting specific governance, successfully carrying out the transaction, floating the shares on the market, and finally, a transition period for the new relationship between the parent company and its former subsidiary or division. Several similar studies of mergers and acquisitions have already shown the usefulness of combining methodologies to better understand the origins of the value creation phenomenon (Bruner 1999). Understanding spin-offs: propositions for a global procedural model and avenues for research © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Spin-offs are complex transactions that can be used to redefine firms’ boundaries. Although these long-term transactions can be structured in numerous ways, the vast majority of studies focus on a single stage in the process (the announcement), and barely examine the dynamic aspect of these transactions. In this section we offer an integrated vision of the spin-off process, which we believe to be necessary to both identify gaps in the literature and to propose new avenues for research. We thus propose a model that jointly analyzes the accounting and financial challenges of spin-offs, allowing us to position them within a procedural approach by dynamically articulating the determinants, motivations, structuring choices, and consequences of these transactions (Figure 2). The determinants and the motivations for spin-offs (3.1) appear to be more complex, linking financial motivations (related to reducing the diversification discount) and accounting motivations (management of the initiator’s accounting image, in particular). Furthermore, the structuring choices made (3.2) (in terms of the assets and liabilities transferred, as well as in terms of governance, or independence from the parent company) have a medium-term scope, and play an important mediating role in the value creation process. Finally, these transactions have multiple consequences (3.3) in terms of operating performance, risk, reduction in asymmetries, improvement of internal and external governance mechanisms, and ultimately shareholder value creation. 3.1. The determinants and motivations of spin-off transactions Spin-off transactions appear to be determined by disciplinary events (❶) relating to a specific institutional and strategic context (❷). Although many authors acknowledge the importance of disciplinary events (takeover threats) as trigger factors for spin-offs, relatively few studies examine the institutional and strategic context, despite the recent study of Boreiko and Murgia (2013) highlighting, in a European context, that the origin of the spun-off entity is one of the most significant explanatory factors for the value creation observed. In this respect, changes in governance prior to the transaction also appear to influence future choices (Ahn and Walker 2007). Shareholder activism may also play a significant role in terms of the determinants for this type of transaction. The arrival of one or more powerful investment funds, accustomed to working with the press, as shareholders of the Accor group may have substantially modified the group’s governance and objectives. The Eurazéo and Colony funds, for instance, took a significant, albeit minority, holding in Accor (30%). These new © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 3. XX © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) shareholders then insisted on a marked change in the company’s strategy, which eventually led to the spin-off. In terms of motivating factors, the first financial aim is to reduce the diversification discount of the stock, as the spin-off will be considered to be the opposite of a diversification. The initiating company, which suffers from the inherent stock market discount applied to most diversified companies (Hoechle et al. 2012), may hope that the spin-off will reduce this discount. From this point of view, improved managerial discipline (❸) was one of the first motivations to be studied (Schipper and Smith 1983). The spin-off transaction also provides an opportunity to generate more value from the assets of the spun-off company, and to hire a new CEO, or even a new management team, in the spin-off. It can also be the moment to renegotiate management incentives in order to obtain strong results, and to set new objectives for management (Aron 1991). The reduction in negative synergies (❹) forms part of this type of motivation (Comment and Jarrel 1993). According to these authors, this reduction involves improving the efficiency of the investment policy by refocusing and abandoning cross-funding practices. The improved visibility of spun-off companies, together with better coverage by financial analysts (❺) further strengthens the financial motivation. The spin-off transaction and the resulting improvements in the transparency of the accounts may reduce the diversification discount, and it may also be possible to prepare more precise forecasts of the initiating company’s future earnings. The second motivation is accounting based and relates to managing the earnings of the two demerged entities, as discussed earlier. Although we have previously emphasized (Section 1) that spinoff transactions create a favorable environment for earnings management, few studies have examined this topic. To our knowledge, the Lin and Yung (2014) study, which shows the pre-spin-off existence and frequency of accruals-based earnings management in an American context (❻), is the only work to address this issue. On the other hand, we found no studies at all examining real earnings management (manipulation of real transactions/activities), although the characteristics of spin-off transactions lend themselves to this behavior (❼). Research should be performed to fill this gap, preferably in a European context. We also note that the financial and accounting motivations are not necessarily independent. By way of example, Biddle et al. (2009) highlight that better quality accounting information is linked to a reduction in under- or overinvestment, as confirmed by André et al. (2014). Spin-offs may therefore provide a means of controlling the risk of over- or underinvestment by providing more relevant accounting information. 3.2. Structuring choices for the spin-off Spin-offs potentially cover different scenarios: partial or total spin-off; removal or not from the scope of consolidation; or the existence, or otherwise, of links between the parent and the subsidiary posttransaction. It may therefore be useful to perform a detailed study of the way in which assets and liabilities are reorganized during the spin-off, as indicated in Figure 2. The scope chosen for the transaction is a determining factor (❽). The Total-Arkéma (2006) transaction apparently required two years of preparation. In addition to the choice of assets and liabilities to be © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Figure 2 Procedural analysis of a spin-off transaction Determinants of the transaction (Jain 1985; Berger and Ofek 1999; Chemmanur and Yan 2004) Reduction in diversification discount ❸ Improved managerial discipline (replacement of management teams, improved incentive mechanisms, etc.) (Schipper and Smith 1983; Aron 1991; Seward and Walsh 1996; Boreiko and Murgia 2013) ❹ Reduction in negative synergies (refocused activities, improved capital allocation, error correction, etc.) (Comment and Jarrel 1995; Desai and Jain 1999; Gertner et al. 2002; Colak and Whited 2007) ❺ Improved visibility and clarity of spun‐off entities ❷ Strategic and shareholder context (origin of spin‐off, shareholder activism, change in governance, etc.) (Allen et al. 1995; Ahn and Walker 2007; Boreiko and Murgia 2013) (Habib et al. 1997; Gilson et al. 2001) Earnings management ❻ Accruals‐based earnings management (upwards management, valuation of spin‐off, etc.) (Lin and Yung 2014) ❼ Real earnings management (improvement in accounting image, achieving results/parent company thresholds, etc.) (no studies identified) Structuring choices for the transaction (methods) Consequences of the transaction (desired outcomes) ❽ Choice of assets transferred and allocation of debts (reorganization of assets and liabilities) ⓬ Improved operational performance (parent company/spin‐off) (Mehrotra et al. 2003; Dittmar 2004; Murray 2008) (Woo et al. 1992; Cusatis et al. 1993; Daley et al. 1997; Desai and Jain 1999; Murray 2008; Chemmanur and Debarshi 2009) ❾ Accounting choices (total or partial spin‐off, deconsolidation, choices relating to earnings management in the spin‐off) (no studies identified) ⓭ Modified level of risk (spin‐off) (Vijh 1994; Huson and Mackinnon 2003) ❿ Choice of governance methods (floating the stock on the market, selecting the CEO, composition of the Board of Directors, remuneration system, anti‐takeover measures, etc.) ⓮ Reduced information asymmetry (parent company/spin‐off) (Vijh 1994; Wruck and Wruck 2002; Qian 2006; Klein and Rosenfeld 2010; Chemmanur et al. 2010) (Krishnaswami and Subramaniam 1999; Veld and Veld‐Merkoulova 2008) ⓫ Choices relating to post‐ transaction relationship between the parent company and the spin‐off (percentage holding retained, overlapping Boards of Directors, industrial and commercial relationships) ⓯ Improved internal/external governance mechanisms (parent company/spin‐off) (Cusatis et al. 1993; Seward and Walsh 1996; Pyo 2007) ⓰ Shareholder value creation (in the short and medium term) (see Table 2 and Table 3) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE ❶ Disciplinary events (deterioration in performance, collapse in share price, takeover threats, etc.) Motivations for the transaction (Semadeni and Cannela 2011) XXI © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) XXII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) transferred into the spun-off entity, Arkéma’s viability also needed to be assured, in other words its ability to make a profit and its financial equilibrium (i.e. its debt levels and growth prospects). Clearly, the group had to disclose appropriate information in the period t-1 (IFRS 5). As suggested in the literature (Dittmar, 2004), companies do not appear to use these transactions to reduce their debt ratios, possibly because of the inherent constraints of valuing entities created via an IPO (Initial Public Offering). Organizing the preparation of the transaction is another key concern (❾), although to our knowledge no academic study has specifically addressed this topic. We consider that the accounting choices made in a spin-off merit further examination. For example, how can prior losses, if any, be cleared in the spin-off (“big bath” strategy)? During this type of transaction, a new CEO will be appointed in the spun-off entity. Mard and Marsat (2009), for instance, focus on the period around the appointment of a new CEO and confirm a rupture in accounting choices: the new CEO of the spun-off company may want to ensure future earnings growth, for example. Research should therefore be undertaken (DeFond 2010) to better determine the “actual quality” of the gains disclosed in companies’ financial reporting during and after the spin-off. Governance decisions also appear to affect the future earnings achieved (❿). Unlike the previous point, there is an abundant literature on the topic which shows, for example, that the origin of the spun-off entity’s management team affects the implementation of potential anti-OPA measures (Chemmanur et al. 2010) and the composition of the board of directors. Other characteristics of the governance system also play a role in this respect. Firstly, because of the number of independent directors that it contains, the structure of the board of directors may influence the decisions made by the CEO (Peasnell et al. 2005). The auditors, specialized boards and committees, and financial analysts are therefore able to influence the management of accounting data, its extent, and its processes. Piot and Janin (2007), for example, show the impact of the audit committee on earnings management. The degree of independence between the parent company and the spin-off post-transaction (Semadani and Cannela 2011) also needs to be taken into account, as does the increase, or otherwise, in capital undertaken by the spin-off around the effective demerger date and reserved for new blocks of shareholders (Klein and Rosenfeld 2010). Finally, we note that although the spin-off splits the initial group in two, the two entities may remain linked post-transaction (⓫). The remaining links can take numerous forms (overlapping boards of directors, retention of a residual holding, commercial relationship, etc.). As far as we are aware, only one study (Semadeni and Cannela 2011) explicitly examines these links, despite the transaction structure potentially affecting the independence of the spin-off. From this point of view, it would therefore be useful to construct a synthetic indicator of independence. We note that there are numerous ways of structuring these transactions, and that the method selected will influence the actual value created. The procedural approach proposed therefore allows us to better identify the value creation potential by introducing a series of individual mediating variables to better account for the diversity of the transactions and their consequences. 3.3. The consequences of the transaction and value creation The ultimate goal is to generate more value from the assets of the spun-off company and the initiating firm. We have identified four consequences of spin-off transactions, linked to value creation (⓰): © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) improved operational performance (⓬), a modified level of risk (⓭), reduced information asymmetry (⓮), and improved internal and external governance mechanisms (⓯). In terms of the level of risk (⓭), the spin-off essentially reduces the group’s diversification and weakens the ability of the spun-off entity to repay its debts as it no longer benefits from the protection of the parent company. The spun-off company is expected to repay its debts solely by means of its own cash flows. In addition, the variability of the spun-off company’s cash flows is potentially greater than that of the initial group because its business is less diversified. The default risk of the spun-off company therefore rises, and its rating is likely to fall. Conversely, in terms of information asymmetries (⓮), we should see a positive value creation effect as each entity’s results will be easier for investors to understand, although the impact of the spin-off on information asymmetry would benefit from being better documented, particularly in a European context. Similarly, the consequences of spin-off transactions on the governance structures of the two entities are poorly understood (⓯). Additional research studies are therefore necessary, from a post-transaction, market control point of view and in relation to the internal governance mechanisms of the two entities. Without a doubt, the value creation (⓰) and improved operational performance (⓬) consequences have inspired the majority of existing research studies, although without generating strong added value, since these studies are generally static and focused on a single stage in the process. In fact, looking at the stock market studies (32 short-term studies and seven long-term studies: see Tables 2 and 3), which form around half of our cited references, we can’t help but be struck by their standardization. Firstly, virtually all of these studies focus on the announcement of the spin-off to the market, without precisely identifying the determinants or motivations for the transaction. The temporal dynamic is ignored, as is the decision chain that led to the transaction, with all aspects of governance generally being overlooked. To our knowledge, unlike mergers (Bruner, 1999), there are no published case studies of spin-offs, which is a serious deficiency. We strongly recommend this topic as an avenue for research: “the anatomy” of a spin-off transaction performed by combining accounting and financial knowledge and strategic and governance considerations, as value creation arises from all of these factors. In the same vein, using a statistically sufficient sample size to analyze the reduction in the initiating company’s market discount, rather than solely measuring cumulative abnormal returns, would be a welcome addition to the literature. This type of research appears to be totally lacking. In addition, although a significant number of studies of post-spin-off operational performance have been performed (eight studies cited, two of which were in a European context, see Table 1), we learn relatively little about the mechanisms and the transmission channels via which these transactions create value. We therefore suggest an alternative avenue for research. Studies need to be prepared in which the transaction samples are much more highly “conditioned”, even if they are smaller in size, so that we can learn more from them. Effectively, attempting to examine spin-offs without other precisions (is the transaction focus-increasing or not, is there a change of CEO or not, is the relative size of the spin-off significant or not, is there total commercial and industrial independence vis-à-vis the parent company or not, etc.) brings strong unobservable heterogeneity to the model data (omitted variables). In order to isolate the impact of the spin-off on the results, the Heckman procedure could be used. This procedure aims to correct for selection bias, since firms carrying out spin-offs may have singular characteristics compared to other firms. Endogeneity may also generate an inverse causality issue. In our case, we could ask whether the spin-off influences performance, or vice versa. Finally, XXIII © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE Patrick Navatte and Guillaume Schier SPIN-OFFS: ACCOUNTING AND FINANCIAL ISSUES ACROSS THE LITERATURE XXIV panel data econometrics and tools such as the generalized method of moments may be useful in this context. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) In 2010, annual total spin-off transactions reached $54 billion, and this amount more than doubled in 2011. These transactions play a significant role in group restructuring flows. On average, spin-offs create shareholder value in the United States. When the transactions are larger, they are more likely to be focus-increasing, and higher value creation will be observed. We also note the quasi-disciplinary character of these transactions, with many spin-offs being carried out following a performance setback or a weakened financial situation. In addition, when smaller firms are floated on the market, the likelihood of them being acquired at a later date increases. This could generate a double gain for the shareholder, firstly by incentivizing managers’ performance and, secondly, the more uncertain gain of an acquisition premium if the firm is subsequently purchased. From an accounting point of view, we firstly note the challenge of potential pre-transaction earnings management of the activities to be split from the group (on which the success of the stock market listing depends), and of earnings management in the initiating company in an attempt to achieve a threshold (related to financial analysts’ forecasts) or to smooth earnings. Other significant challenges are the risk of opportunistic management of the scope of consolidation, and the use of “fair value” to value contributions. Overall, many research contributions remain to be written on this topic, as identified in the present article by means of a global procedural model. By highlighting the different determinants and motivations, the diverse ways of structuring these transactions, and their consequences, this model identifies certain gaps in the literature. Thus in Europe, for example, no studies have analyzed pre-transaction earnings management, or the choices that led to a total spin-off being favored over a partial transaction. Future dynamic and multivariate studies (panel data econometrics) would do well to examine the European context, and to analyze the parent company accounts preand post-transaction, without forgetting the path taken by the newly spun-off entity. © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) Conclusion Notes © Association Francophone de Comptabilité | Téléchargé le 29/11/2023 sur www.cairn.info (IP: 54.226.52.147) 1. In the United States, spin-offs are tax neutral (Frank and Harden, 2001), provided that the parent company distributes at least 80% of the shares of its subsidiary (cf. Section 355 of the United States Internal Revenue Code). According to Huyett and Koller (2011), the tax aspect of these transactions should not, however, be ignored since it goes some way to explaining why firms choose to spin-off divisions rather than sell them, particularly when the accounting gain is significant. 2. 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