This paper investigates how spin-offs affect capital allocation decisions in diversified firms.
The sensitivity of capital expenditures to investment opportunities, representing the
efficiency of capital allocation decisions, improves when firms undertake spin-offs. The
improvement in the efficiency of capital allocation decisions is most pronounced immediately
following the completion of spin-offs (though it attenuates thereafter) and in companies that
operate in a moderate (as opposed to a high or a low) number of businesses pre-spin-off …