Managerial focus and investment efficiency:‐ Evidence from spin‐offs

Abstract

We explore investment efficiency before and after a spin‐off to assess whether post‐spinoff managerial structure helps maintain investment efficiency. Our findings reveal that the investment efficiency of parent firms remains significant when there is a clear separation of management between the parent and spun‐off firms. However, a considerable decline in efficiency is observed after the spin‐off in cases where there is overlapping management. This decrease in efficiency is particularly pronounced when the parent and spun‐off firms operate in different industries and are geographically distant from each other. Furthermore, we show that inefficient alignment of incentives for the overlapped management exacerbates this decline in investment efficiency.