Good morning. In 1993, three finance professors at Penn State published a paper that should have changed how individual investors think about corporate actions. It documented that companies spun off from their parents had outperformed the market by approximately 33 percentage points, in aggregate, over the three years following separation. The outperformance was consistent, statistically significant, and persisted across industries and time periods.

The paper has been cited thousands of times. It has been replicated multiple times with different samples and different methodologies. The core finding has held up across thirty years of data. And yet the spinoff premium remains one of the most persistent inefficiencies in corporate finance, because acting on it requires the one thing most investors cannot sustain: patience.

Friday's memo covered divestitures from the parent's perspective. This morning takes the reader perspective. If you are going to invest in corporate restructuring, the spun-off company is usually where the excess returns sit.

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THE EVIDENCE

Thirty Years of Empirical Support

Patrick Cusatis, James Miles, and J. Randall Woolridge, writing in the Journal of Financial Economics in 1993, studied 146 tax-free spinoffs completed between 1965 and 1988. They found that the spun-off subsidiaries generated matched-firm-adjusted abnormal returns of 4.5 percent over the first year after separation, 25 percent over two years, and 33.6 percent over three years. The parent companies also outperformed their benchmarks, though by a smaller margin. The combined entity, parent plus spinoff, delivered sustained outperformance relative to industry-matched peers. Both the two- and three-year figures were statistically significant at the 5 percent level.

John McConnell and Alexei Ovtchinnikov extended the finding in 2004 in the Journal of Investment Management. Their sample covered 36 years of U.S. spinoff data. They confirmed positive long-run excess returns but documented something important about the distribution: the aggregate outperformance was significantly influenced by a small number of outliers. Parent companies outperformed their benchmark by roughly five percent over 36 months, a result that was not statistically distinguishable from zero once outliers were removed. The implication was not that the spinoff premium disappeared, but that it was concentrated rather than uniform. Stock selection within the category matters.

Chris Veld and Yulia Veld-Merkoulova, writing in the International Journal of Management Reviews in 2009, conducted a meta-analysis of 26 spinoff event studies covering different countries and time periods. They found a significantly positive average abnormal announcement return of 3.02 percent, with larger effects for bigger spinoffs, tax-friendly transactions, and focus-increasing separations. The announcement-effect premium replicates across markets. The long-run outperformance is more geographically specific: Veld and Veld-Merkoulova's own 2004 Journal of Banking and Finance study of 156 European spinoffs found insignificant long-run excess returns after controlling for size and book-to-market effects, suggesting the 33.6 percent three-year premium documented in U.S. samples is not cleanly replicated in European data.

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THE MECHANISMS

Why the Premium Exists

The next generation of research tried to explain why spinoffs outperform. Three mechanisms have emerged from the empirical work.

The first is information asymmetry. Sudha Krishnaswami and Venkat Subramaniam, in a 1999 JFE paper, argued that conglomerates suffer from an information problem. Analysts and investors cannot cleanly evaluate the business units when they are bundled together inside a parent's consolidated financials. The spinoff unbundles the reporting. Unit economics that were previously obscured become visible. The discount the market had been applying to the bundled entity disappears as the components get priced independently.

The second is investment efficiency. Seoungpil Ahn and David Denis, writing in JFE in 2004, studied internal capital markets before and after spinoffs. They found that pre-spinoff, parent companies systematically misallocated capital across divisions, overinvesting in weak units and underinvesting in strong ones. Post-spinoff, both entities made better investment decisions because each had its own cost of capital, its own hurdle rate, and its own management team accountable for its own returns. The operating improvements that follow spinoffs come from better capital deployment rather than cost-cutting.

The third is management focus. Thomas Chemmanur and An Yan, writing in JFE in 2004, developed a theoretical model showing that spinoffs align management incentives with unit-specific performance in ways that are impossible inside a parent structure. The CEO of a spun-off subsidiary gets compensated on that subsidiary's stock. The decisions that follow are sharper, more urgent, and more responsive to the unit's actual competitive dynamics than anything that would have emerged from the parent's portfolio review process.

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THE CONSTRAINT

Why the Premium Persists

The obvious question about any anomaly that has been documented for thirty years is why it has not been arbitraged away. The answer has two parts.

First, spinoffs are mechanically awkward to own. Institutional holders of the parent often sell the spun-off shares because the new entity falls below their market cap threshold, outside their mandate, or lacks index inclusion. This creates indiscriminate selling pressure that depresses prices in the first several months post-distribution. Individual investors receiving fractional shares often sell immediately for convenience. The result is a pool of sellers who are not pricing the business, they are just exiting. The buyers who accumulate on the other side are the ones who read the research and have the time horizon to hold through the reset.

Second, the outperformance takes years to materialize. Cusatis and his coauthors found that the bulk of the abnormal returns accrued in the second and third years post-separation. McConnell and Ovtchinnikov found the same pattern with a longer lag. A fund manager whose clients evaluate performance on a quarterly or annual basis cannot easily own something that may underperform for twelve months before the thesis begins to work. The mandate horizons that dominate institutional capital are shorter than the horizon over which the anomaly plays out.

The result is a persistent inefficiency that is easy to identify and hard to capture. The research is unambiguous. The behavioral and structural frictions that create the premium are equally unambiguous. The investors who have captured the premium consistently, such as Joel Greenblatt at Gotham, are the ones who have built operating structures that allow them to hold through the lag period. Most capital cannot.

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THE CURRENT CASES

Testing the Framework

Three recent spinoffs provide natural test cases. Fortive separated from Danaher in 2016. Veralto separated from Danaher in September 2023. GE Vernova separated from General Electric in April 2024. Each entity was launched with clean capital structure, experienced management, and distinct unit economics from the parent.

Fortive has had the longest track record as an independent entity. Over its first several years, it executed its own tuck-in acquisition program, spun off its own subsidiary, and generated cash flow growth that consistently exceeded the S&P 500. The compounding logic that made Danaher a successful parent transferred to the subsidiary when it was released to operate on its own capital logic. Veralto and GE Vernova are too recent to have completed the full 36-month window that the academic research identifies as the relevant measurement period. The pattern the research predicts says both should be evaluated against industry benchmarks over the next two years, not against expectations set at the time of distribution.

The broader point applies to any spinoff, not just these three. The academic framework tells you what to look for: a clean separation, a focused operating logic, a compensation structure tied to the new entity's stock, and a distinct cost of capital. When those conditions are met, the empirical record says excess returns follow. When they are not, the spinoff is a cosmetic restructuring that leaves the underlying economics unchanged.

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The spinoff premium is one of a handful of truly persistent inefficiencies in corporate finance. The academic support is deep. The mechanisms are well understood. The barrier to capturing it is structural rather than informational. For allocators with long horizons and flexible mandates, it remains one of the cleanest sources of excess return available in public markets.

Tomorrow we turn to the master metric that underlies every capital allocation decision: return on invested capital, its measurement problems, and why the number most companies report is not the number investors should care about.

— Marques

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Marques Blank is the founder of Blank Capital (fractional CFO and FP&A advisory) and Blank Capital Partners. Former Northrop Grumman and Citibank. CMA, MBA, Series 65.

This newsletter is for informational purposes only and does not constitute investment advice. Research cited: Ahn, S., & Denis, D.J. (2004). Internal capital markets and investment policy: Evidence from corporate spinoffs. Journal of Financial Economics, 71(3), 489-516. · Chemmanur, T.J., & Yan, A. (2004). A theory of corporate spin-offs. Journal of Financial Economics, 72(2), 259-290. · Cusatis, P.J., Miles, J.A., & Woolridge, J.R. (1993). Restructuring through spinoffs: The stock market evidence. Journal of Financial Economics, 33(3), 293-311. · Krishnaswami, S., & Subramaniam, V. (1999). Information asymmetry, valuation, and the corporate spin-off decision. Journal of Financial Economics, 53(1), 73-112. · McConnell, J.J., & Ovtchinnikov, A.V. (2004). Predictability of long-term spinoff returns. Journal of Investment Management, 2(3), 35-44. · Veld, C., & Veld-Merkoulova, Y.V. (2009). Value creation through spin-offs: A review of the empirical evidence. International Journal of Management Reviews, 11(4), 407-420.