Assessing the market performance of US corporate spin-offs: effects of directors’ age and external board appointments along with their interaction

Abstract

Purpose Spin-offs, as “popular” corporate restructuring mechanisms in the USA, aim to boost the shareholder value after the separation of a subsidiary/division from its divesting (parent) company. The role of the board, as a “vital” governing mechanism, in the success of these spun-off subsidiaries (child firms) is very critical because directors must ensure that they can provide these recently independent entities with their in-depth expertise, knowledge, industry experience, corporate connections and other resources so that adapting to their “new” market conditions will not be problematic. The purpose of this study is to examine whether two board demographic characteristics (namely, board members’ age and external directorships) along with their interaction affect the child firm’s market valuation, which extends previous work on the board of directors and corporate spin-offs. The theoretical arguments are grounded in resource dependence and upper echelons theories. Design/methodology/approach The sample included 136 completed spin-offs between 2000 and 2014. The data on board characteristics were collected by using companies’ proxy statements available on the securities and exchange commission website whereas firm and industry characteristics were collected by using the Compustat database. Findings The author has found that considered independently, board members’ average age and external directorships show positive and significant relationships with the change in market valuation of the child firm; however, the interaction effect of both variables appears to lessen this effect but remains significant. Originality/value The authors have shown that while the main effects of both board-level variables have positive and significant effects on the market performance of spun-off subsidiaries (as hypothesized), their interaction will make this effect go in the opposite direction.