Capital Structure Theories in US Corporate Divestitures: A Study on Spin-Off Firms

Xian Chen (), Sanjib Guha and Tahsina Haque Simu
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Xian Chen: Department of Accounting and Finance, Luter School of Business, Christopher Newport University, 1 Avenue of the Arts, Newport News, VA 23606, USA
Sanjib Guha: Department of Business, Accounting & Sports Management, Elizabeth City State University, 1704 Weeksville Rd., Elizabeth City, NC 27909, USA
Tahsina Haque Simu: Department of Accounting, Finance & Economics, College of Business, Bowie State University, 14000 Jericho Park Road, Bowie, MD 20715, USA

IJFS, 2025, vol. 13, issue 3, 1-26

Abstract: Some giant US conglomerates are now undergoing corporate spin-offs or are considering such spin-offs in the near future. Corporate spin-offs offer a unique opportunity to assess corporate capital structure decisions. The leverage ratio of the spin-off firms represents their initial capital structure. We investigate the capital structure of corporate spin-offs and find evidence that they adhere to the trade-off theory. This study provides evidence that the subsidiary firms tend to aim for a target capital ratio during the sample period. The results indicate that the partial adjustment model with firm fixed effects is a good fit for the data sample. The parent companies in corporate spin-offs exhibit a similar pattern but with a slower adjustment speed. The tendency to target capital ratios is observable in both market value and book value leverage measures for the parent and subsidiary firms. Indicators of the pecking order assumption do not possess statistically significant coefficients. Changes in share price affect market debt ratios in the short term. With alternative definitions of leverage, the estimated adjustment speeds vary. In the case of longer horizons, the results align with a continuous rate of adjustment.

Keywords: spin-off; pecking order; trade-off theory (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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