Corporate Spin-Offs and Closed-End Funds in a State-Preference Framework

Jacques A Schnabel

The Financial Review, 1992, vol. 27, issue 3, 391-409

Abstract: Miller's clientele argument for market value subadditivity as an explanation for stockholder wealth gains in corporate spin-offs and discounts from the net asset value of closed-end fund shares is examined in the context of a simple state-preference model. It is shown that binding short sales constraints induce value subadditivity and thus render Miller's clientele argument valid. This is true regardless of whether or not divergence of opinion among investors or state-dependent utility functions exist. In the absence of binding short sales constraints, value additivity prevails and Miller's clientele argument is not viable. Although personal taxes are not considered in the model developed in this paper, it is shown that tax-timing options reinforce the existence of value subadditivity. Copyright 1992 by MIT Press.

Date: 1992
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