Resolving foregone corporate opportunities

Empirical studies show that stock prices are depressed when a corporation announces an equity issue. One ramification of this phenomenon is that managers acting in the best interests of existing shareholders will not finance positive net present value projects with equity issues if the firm does have not sufficient slack or debt capacity to do so. Consequently, the value of the firm is not maximized, and there is a misallocation of resources. One solution to this problem--the spin-off of positive net present value projects is analyzed in the context of the legal environment.; A spin-off generally entails registration of the stock of the subsidiary corporation, and disclosure is required under federal and state law. In the legal context, disclosure of the inside material information resolves the asymmetric information problem at the heart of the misallocation.; The dissertation examines how the market reacts to spin-off announcements and the motivation of managers deciding to spin-off assets.; Analysis of the market reaction to the 158 spin-offs in the sample shows that (1) prior to the announcement date debt-equity ratios increase, (2) the higher the ratio of current assets to current liabilities, the higher the abnormal returns, (3) the higher (lower) the market value of the firm to the book value of the firm, the lower (higher) the abnormal returns, and (4) firms having market value of the firm to book value of the firm ratios below the sample mean ratio value had higher abnormal returns than firms having market value of the firm to book value of the firm ratios below the mean ratio value. These findings are consistent with the theory predictions.; Finally, it is observed that following a spin-off managers of firms with high debt-equity ratios contract and retrench their firms whereas managers of firms with low debt-equity ratios expand their firms. This behavior is consistent with the theory prediction.