Corporate Spin-offs and the Determinants of

Stock Price Changes in Malaysia∗

By
Yoon Chung Sin
Alan Yoon Associates, Chartered Accountants

Mohd Ariff
Monash University

Abstract:
This study appraises the impact of Spin-off decisions in addition to the determinants of share price
movement for Malaysian listed companies between 1986 to 2002. The empirical evidence from a sample
of 85 Spin-offs shows positive and affirmative announcement effects on stock prices. The parent of the
Spin-off companies encounters positive abnormal returns for the two days before and after the
announcement day while the Spin-off companies experience comparable effect after the listing date. The
analysis is done over a period of 100 days prior and 50 days subsequent to the announcement day. Three
different approaches incorporating non-synchronous _ adjustment, i.e. Risk-adjusted, Market-adjusted and
Control Sample-adjusted Market Models, were drawn on in the research methodology. Tax, Age, Market
Capitalization and Focus factors were considered as possible determinants of Spin-off performance.
However, the findings reveal that only Market Capitalization and Age factors are significant to the market
price variation. The Cumulative Abnormal Returns surrounding the spin-off announcement day is
positively correlated to the Market Capitalization but negatively correlated to the Age. In conclusion, this
study validates that the impact of the returns is determined by the size and conventional age of the
companies. The large companies and those that are newly incorporated tend to have a bigger magnitude of
the positive wealth effect.

Key words: Spin-offs, Restructuring, Emerging Markets, Tax Motivation, Size, and Age

Introduction

This study intends to analyze the impact of corporate spin-off phenomenon as well as the
determinants in Bursa Malaysia, an emerging market. The earliest recorded spin-off in this
capital market occurred in 1970 in the case of a popular conglomerate called Magnum
Corporation. Since then, there have been 125 spin-offs until year 2002. This accounting-cum-
finance phenomenon that is occurring at an increasing frequency in several Asian countries has
yet to be studied systematically. Hence, this provides the current researcher both an opportunity
and motivation to make new contributions in this area via this study.

∗
This paper was presented and given the best paper award at the Asian Finance Association International
Conference 2005.

1
 The capital market in Malaysia is classified by the World Bank as an emerging market
for the simple reason that per capital income in this country is less that the threshold1 for
warranting a classification as developed. However, market specialists such as Dow Jones and
others have included this capital market as among the 20 plus markets in the world for
international diversification of investments. There are about 800 firms on the Bursa Malaysia, the
single Malaysian exchange for the capital market2. Of these, about 500 were listed on the main
board and 300 were listed on the second board. In total, these companies had a market
capitalization of averaging over RM400 billion in which the main board had about RM380 billion
and second board RM20 billion. There is also a bond market with a capitalization equal to
averaging about 25 percent of the Gross Domestic Products (GDP). The economy is an
industrializing one with industrial output accounting for 35 percent of the GDP. For many years,
Malaysia is the most open country among the developing countries to foreign investment3. It was
quick to recognize the powerful role that foreign investors could play in fuelling export-led
growth, and it is well-placed to attract such investment during the years of regional structural
adjustment in the late 1980s. Partly as a result of Foreign Direct Investment (FDI) inflows,
Malaysia was among the world’s fastest growing economies prior the crisis.4 At the same time,
however, the years leading up to the crisis revealed a growing disquiet in some Asian countries
about their continuing ability to attract FDI in the face of competition from countries such
as China. Related to the issue of possible investment diversion, questions were also raised about
whether FDI inflows were contributing sufficiently to technology transfer and industrial
upgrading.

1
The World Bank defines a developing country as one having a per capita GNP that would place it in the
lower or middle-income category; i.e. at the end of 1995, a developing country had an annual per capita
GNP less than USD8,955.
2
Two stock exchanges, the then Kuala Lumpur Stock Exchange (KLSE) and Malaysian Exchange of
Securities Dealing and Automated Quotation Bhd (MESDAQ) had merged to form Bursa Malaysia. KLSE
was incorporated in 1976 and MESDAQ was incorporated in 1997.
3
Rank by Stephen Thomsen in 1999 for Organization for Economic Co-operation and Development.
4
From the early 1980s through the mid-1990s, the economy experienced a period of broad diversification
and sustained growth averaging almost 8 percent annually. By 1999, nominal per capita GDP had reached
RM3,238. New foreign and domestic investment played a significant role in the transformation of
Malaysia’s economy. Manufacturing grew from 13.9 percent of GDP in 1970 to 30 percent in 1999, while
agriculture and mining, which together had accounted for 42.7 percent of GDP in 1970, dropped to 9.3
percent and 7.3 percent, respectively, in 1999. Manufacturing accounted for 30 percent of GDP in 1999.
Source of statistics taken from the 2001 Bank Negara Malaysia Report

2
 In the wake of the financial crisis which has swept through the Asian region5, it is useful
to look at the experience of various Asian countries and the role of foreign investors in their
economic development. In all the four countries, i.e. Malaysia, Indonesia, Philippines and
Thailand, development strategies include a selective approach to investment promotion with a
clearly circumscribed role for foreign direct investors. Such partial openness allows foreign firms
to contribute to rapid economic growth driven by exports, but it has been less adept at delivering
sustainable development. In many cases, indigenous capabilities have not been developed
sufficiently in those export sectors dominated by foreign multinational enterprises leaving the
host country vulnerable to changes in investor sentiment and to growing competition for such
investment from other countries.

The growth of the emerging markets has received much attention in the past few years.
Investors have been attracted to the potential for high returns along with diversification benefits
of such markets.6 Managers and trustees of US. pension funds have begun for the first time to
commit a portion of their pension assets to emerging market debt and equity securities. The
unique characteristics of emerging markets are helping academics to better understand the
development and application of appropriate financial management techniques in companies
operating in such environment.

If applying financial management techniques makes the spin-off appropriately on a

voluntarily manner, then the Bursa Malaysia is supposed to react positively to the information.
With the data set of the Malaysian capital market, it will be useful to have a general assessment of
the reaction of spin-offs in this emerging capital market as a first of many that may be done in
several emerging markets. Such assessment will hold lessons on the reaction of similar capital
markets and have implications for corporate finance and investment management in emerging
capital markets. In addition, the study will attempt to reveal the relationship between spin-offs,
improved focus and managerial efficiency. Arising from this analysis, this study will be able to
assess the extensive effect to which age and market capitalization of spin-offs have on
shareholders welfare. Knowledge of factors such as age and size of spin-offs would also assist

5
After nearly a decade of strong economic growth averaging 8.7 percent annually, Malaysia was hard hit
by the regional financial crisis of 1997 to 1999. The GDP suffered a sharp 7.5 percent contraction in 1998
but rebounded in 1999 to grow by 5.6 percent for the year. Source of statistics taken from the 2001 Bank
Negara Malaysia Report.
6
Based on the International Finance Corporation’s Emerging Markets Data Base for period 1985-1995, a
commonly held view is emerging stock markets are characterized by high returns and high volatility.

3
financial decision maker in the areas regarding regulatory compliances in smaller domestic versus
bigger foreign companies.

Regulation of Spin-offs

The legal concept of Tax-free Spin-off can be found in the Inland Revenue Service (IRS)
code Section 355 of the Securities and Exchange Commission Tax Code and the Treasury
regulations Section 1, 355-2 in the United States7. There was an amendment in the legal
framework after 1969 to forbid tax avoidance. In fact, after the Tax Reform Act of 1986, a spin-
off or other divisive reorganization is the only way a company can distribute appreciated property
to shareholders without incurring a corporate-level tax. An added appeal is that corporations
have considerable latitude in reporting spin-offs in their financial statements. The regulation on
Spin-off became more pronounce in Europe recently as Spin-offs only became more in vogue
during the last decade. In Malaysia, legal representation was initially rest on the Capital Issues
Committee and the Foreign Issues Committee. Spin-offs are regulated under the Arrangements
and Reconstruction Section of the Companies Act 1965, ever since 1996.

In Malaysia, following the procedure of companies going for listing, spin-off application
are reviewed by the Securities Commission, Companies Commission of Malaysia and the Bursa
Malaysia on difference premises.8 Spin-offs are regulated under Arrangements and
Reconstruction, Section 176 of the Companies Act 1965. In any scheme of arrangement or
reconstruction which results in the transfer of assets or undertakings of a foreign incorporated
company to Malaysia, the Securities Commission requires that the entries in the books of
accounts of “mirror company” comply with the provision of Section 60 of the Companies Act
1965.

7
IRS Section 355 includes four key requirements for tax-free treatment: 1. Controlled corporation, 2.
Securities distribution, 3. Active businesses, and 4. Not a distribution device. Treasury regulations Section
1, 355-2 adds two additional requirements: 5 Business purpose, and 6. Continuity of interest. See
Appendix A for details.
8
Prior to 1995, Capital Issues Committee (CIC) and the Foreign Issues Committee were reviewing. CIC
was set up in 1968 by the Minister of Finance to ensure the orderly development of the capital market by
regulating the issue of securities by public companies and the listing of such securities on Bursa Malaysia
including Spin-offs. See the requirements for Spin-offs in Appendix A.

4
 The listing of spin-off subsidiary and or associated companies of a listed holding
company could be considered if the pretax profits and net tangible assets of the subsidiary and or
associated company to be listed should not account for more than 35 percent respectively of the
consolidated pretax profits and net tangible assets of the Group in respect of the past five years
for a Main Board listing or three years for a Second Board listing. The threshold level of after tax
profits and or net tangible asset contribution for the listing of subsidiary and or associated
companies has been raised from 35.5 percent to 50 percent in 1997 onwards.

Another consideration is the parent company excluding the subsidiary and or associated
company to be listed and existing listed subsidiary and or associated companies should on its own
meet Securities Commission’s requirements for listing as if were a new company seeking listing.

The applicant subsidiary and or associated company should also be involved in a

particular business of its own with profits able to meet Securities Commission’s criteria for listing
with respect to track record and future prospects. The relationship between the subsidiary and or
associated company seeking listing and the other companies within the group, including the
holding company, should not give rise to intra-group competition or conflict of interest situation,
and the subsidiary and or associated company to be listed should demonstrate that it is not overly
dependent on the other companies with the Group including the holding company, in term of its
operations, including purchases and sales of goods, management policies and finance.

There has been no Capital Gains Tax on share disposal. However, an acquisition of
shares in a real property company shall be deemed to be an acquisition of chargeable assets, and
where such shares are disposed of shall attract Real Property Gains Tax (RPGT) – Schedule 2,
Section 34A RPGT Act (1976). It is difficult to rely on Section 17.1 (c) to claim exemption for
this RPGT. After 1997, it is not possible to utilize the “bonus shares”9 approaches to exempt
RPGT on share disposal of real property companies.

Claiming Section 17 of the RPGT involves assets that are transferred between companies
in the same group to bring about greater efficiency in operation for a consideration consisting of
shares in the company or substantially of shares in the company and the balance of a money
payment. Another group of including assets that are being transferred for any consideration

9
It was possible to use distribution of bonus shares as consideration to save RPGT on selling of land
together with the real property companies before 1977.

5
between companies in any scheme of reorganization, reconstruction or amalgamation; and assets
that are distributed by a liquidator of a company and the liquidation of the company was made
under a scheme of reorganization, reconstruction or amalgamation.

Literature Review

Table 1: Prior Research Methodologies and Variables

Study /Place Methodology Variables

Schipper & Smith (1983) / US Market Model Tax, Efficiency & Size

Hite & Owers (1983) / US Market Model Merger, Focus , Tax & Size

Miles & Rosenfeld (1983) / US Mean- adjusted Voluntary & Involuntary

Rosenfeld (1984) / US Mean-adjusted Spin-off & Sell-off

Copeland, Lemgruber & Mayers Market Model & Mean- Success, Size & Tax
(1987) / US adjusted

Kudla & McInish (1988) / US Market Model Pure play & Size

Cusatis, Miles & Woolridge Market Model & Mean- Merger

(1993) / US adjusted

Seward &Walsh (1996) / US Market Model Governance

Johnson & Klein (1996) / US Market Model Investment Improvement

Uddin & Ariff (1998) / Singapore Market Model Stakeholders Revaluation

Krishnaswami & Subramaniam Market Model Pure play, Merger & Size
(1999) / US

6
Veld & Merkoulova (2003) / Europe Market Model Governance, Focus & Size

Chronologically, positive finance theory in general, and those related to Spin-off,

developed initially in two stages. The first stage was capital market research, which drew on the
Efficient Market Hypothesis (EMH) and the Capital Asset Pricing Model (CAPM) from financial
economics. The semi strong form of the EMH is the form most directly related to finance. Spin-
off and the price impact of the event have been explained by reference to seven models:
1). Valuation, [Hearth & Zaima (1986); and Leshchinski (2002)]
2). Agency, [Jensen & Meckling (1976)]
3). Wealth-Transfer, [Galai & Masulis (1976); and Maxwell & Rao (2003)]
4). Clientele, [Hakansson (1982); Vijh (1994); and Schnabel (1992)]
5). Divergence of Opinion, [Miller (1977)]
6). Information Asymmetry, [Habib, Johnson & Naik (1997), Gilson, Healy, Noe &
Palepu, Krishnaswami & Subramaniam (1999), and Veld & Merkoulova (2003)]
7). Debt Allocation, [Chemmanur (2003)]

Empirical tests on the Spin-offs events have confirmed that historical significant
information content had effects for the marketplace in terms of Cumulative Abnormal Return.
The seven models prevailing on the firm and management affects the responsiveness and the
nature of price changes following spin-off announcements10.

Market Model is the most common research model used in the previous studies as
chronicled in Table 1 while Tax, Size and Focus are the most common variables analyzed,
amongst these studies.

Data and Methodology

10
However, there is still no agreement among the researchers on the factors influencing on the significant
wealth effects created by the Spin-off decision particularly the wealth redistribution from bondholders to
the shareholders.

7
 Sharpe (1963) developed the standard form of the general equilibrium relationship for
asset returns now known as Market Model11. It is a statistical model, which relates the return of
any given security to the return of the market portfolio. It is based on the empirical version of the
Capital Asset Pricing Model (CAPM). In the CAPM, all economy-wide news is lumped together
into one single term in the equation i.e. the stock’s beta as the sensitivity to all types of economy-
wide news.

Considering the information content of spin-off study with daily data, the event will be
the spin-off announcement and the analysis period consists of a defined period around the
announcement day. This permits examination of periods surrounding the events. The analysis
period in this event study is defined as –100 to +50 days around the announcement day. Negative
sign means before the date of announcement whereas positive sign means after the announcement
date.

Notation and time line are defined to facilitate the measurement and analysis of abnormal
returns. Returns will be indexed in event time using t. Defining t = 0 as the event date, t = -100
days to t = +50 days represent the event window for analysis, and t = -63 months to t = -3 months
constitutes the estimation window to apply the Market Model for obtaining α and β.12

The alpha, α, or the Regression intercept measures the unexplainable performance

relative to the market model, which means the intercept of the alpha should be zero when using
the market model. The alpha is the intercept from a regression of abnormal return of the risk-free
return on the market’s abnormal returns. The αj represents the average incremental rate of return
on the portfolio per unit of time. A randomly constructed portfolio can be expected to have a
zero value for αj. In addition, if the company is not doing as well as a random selection of buys
and hold policy, αj will be negative.

It is interesting to note that a positive intercept in any sample of returns on a portfolio

might be due to random chance or to the superior performance of the companies. Thus in order to
make inferences regarding company’s performance, we need a measure of the standard error of

11
The Market Model differ from CAPM in that there is no imposition of constraints and the model “allows
for” changes in firm’s stock price relative to the market.
12
The study chooses day –100 to day +50 as the window period of analysis for the parent company
because pre and post spin-off days are needed for the research. In the event of the spun-off firm, only 50
days were used as there were no trading days before the listing.

8
estimate of the performance measure. Least square regression provides an estimate of the
dispersion of the sampling distribution of the intercept.

The, β, Beta or the Slope of characteristic line is being estimated using daily data.
However, alpha α mentioned earlier estimated from monthly returns data αm is being changed to
daily alpha αd as in the following equation:

αd = (1 + αm )1/22 – 1 …………………………(1)
αi = E(Ri,t) – βi E(Rm,t); …………………………(2)

αi is not constrained to zero, treated as a parameter of the equilibrium return generating process
and assuming there is no ∈i,t,, the stochastic error term.

Therefore,
βi = covariance (Ri,t , Rm,t) / variance Rm,t ………………(3)

The study here adopt three different models in the estimation of the abnormal return as
follows:
1) Risk-adjusted Market Model,
2) Market-adjusted Market Model, and
3) Control Sample adjusted Market Model

Principal Hypotheses

Hypotheses 1

Null Hypothesis

Ho: The market value of the post-spin-off companies after the announcement of spin-
offs is the same as the pre-spin-off entities in Malaysia. There is no wealth effect
from the announcement of spin-offs.

i.e. MV (P)as + MV (S)as = MV (E)bs, AR = 0 ………….(4)

9
Alternate Hypothesis

Ha: The market value of the post-spin-off companies after the announcement of spin-
offs is greater than the pre-spin-off entities in Malaysia. There is wealth effect
from the announcement of spin-offs.

i.e. MV (P)as + MV (S)as > MV (E)bs, AR > 0 …………(5)

Where, MV = market value;

(P)as = post-spin-off parent company;

(S)as = post-spin-off subsidiary company;

(E)bs = pre-spin-off entity; and
AR = abnormal return.
Here, the null hypothesis is rejected if greater abnormal return exists for the post spin-off
companies than the pre-spin-off entity during the analysis period of the spin-off
announcement. This means that there is wealth effect created by spin-offs by such
comparison.

Hypothesis 2
Null Hypothesis
Ho: The market value of the spin-off companies after the announcement of Spin-offs
is the same as the matched non-spin-off companies during the same period.
There is no wealth effect from the announcement of Spin-offs.
i.e. MV (P)as + MV (S)as = MV (K), AR = 0 ………..(6)
Alternate Hypothesis
Ha: The market value of the spin-off companies after the announcement of Spin-offs
is greater than the matched non-spin-off companies during the same period.
There is wealth effect from the announcement of Spin-offs
i.e. MV (P)as + MV (S)as > MV (K), AR > 0 ………..(7)
Where,
K = matched non-spin-off company

Here, the null hypothesis is rejected if greater abnormal return is found for the spin-off
companies than the matched non-spin-off companies during the analysis period of the spin-

10
 off announcement. This means that there is wealth effect created by spin-offs by such
comparison.

Hypotheses 3
Null Hypothesis
Ho: Similar characteristics occurs in Malaysian spin-offs and non-spin-offs companies.
Alternate Hypothesis
Ha: There are different characteristics.

The characteristics to be look into are improved focus, tax status, age and market
capitalization. Here, the null hypothesis is rejected if there are different characteristics
prevailing, comparing the spin-off and non-spin-off companies.

Subsidiary Hypotheses

Four subsidiary hypotheses are formulated by considering the possible determinants. The
alternative hypotheses of these subsidiary hypotheses to be tested are:

(1). The magnitude of the capital market reaction to the spin-off announcement depends
on the size of the spin-off company in relation to the size of the parent company before
spin-off.
(2). The longer the age of parent company at spin-off, the larger the wealth effect of the
shareholders.
(3). Tax status is one of the factors inducing corporate spin-off.
(4). Improved focus is one of the determinants for corporate spin-off.

For the regression model, as dependent variables are the various cumulative abnormal
returns over selected intervals that were significant. The cumulative abnormal return is explained
by means of regression as a function of several independent variables:

CAR j = α0 + α1Focus + α2Tax + α3 Age + α4Size +∈j …….(9)

11
Descriptive Statistics

In Table 2, descriptive statistics are presented on the abnormal returns of spin-off parent
companies. There are three sets of numbers, for the 85 observations, making a total of 255 data
points on the spin-off companies. There is a corresponding set of 85 firms matched with the
sample. The statistics for all the three data sets indicate that 75 percent of the abnormal returns
were positive while the matched sample of non-spin offs had just 39 percent positive price
changes. This indicates that there is a high probability of stock price increases with spin-off
decision compared to firms that were not undergoing spin-off event.

The mean of the spin-off abnormal returns is 21 percent compared to 4 percent for the
non-spin-off samples. The standard deviation is quite close across the firms which seems to
suggest that these companies have similar risk patterns probably because spin-off parents are well
established firms with long experience, larger capitalization, which would lead to higher price
volatility. The range between the minimum and the maximum for the spin-off samples is more
than five times than the non-spin-off samples. This great disparity is explainable as being caused
by the spin-off effect on the measured variable. There is no spin-off impact on the non-spin-off
companies: implicitly, spin-off firms must have greater variability. The high Jarque-Bera test
value in both samples indicates normality of the distribution of both the samples selected.

Table 2: Descriptive Statistics of the abnormal returns for the Parent and Spin-Off companies
Sample and Matched Sample, Bursa Malaysia, 1986 to 2002

Parent Companies Matched Sample Spin-Offs

Percentage Positive 75 39 84
Mean 0.21 0.04 0.27
Standard Error 0.4966 1.549 0.2750
Median 0.182 0.062 0.3527
Standard Deviation 0.045 0.047 0.011875
Sample Variance 0.00203 0.00221 0.00014
Kurtosis 4.73 7.35 4.053663
Skewness 0.428 0.199 0.112949
Minimum -0.085 -0.037 -0.767
Maximum 0.461 0.067 3.457
Count 85 85 85
Jarque-Bera 117 80 74

12
 These statistics indicate significant positive abnormal returns of 9 percent higher than that
of the parent companies. The mean is also higher by 6 percent. By presenting these average
abnormal returns values, we can see that there is a better performance in terms of wealth
generation for the spun-off companies as compared to the parent companies. The Skewness value
shows more of the Spin-off companies have abnormal returns more than 27 percent. This
validates that there are actual returns from the Spin-off phenomenon for the Spin-off companies.
The range between the minimum and the maximum abnormal returns is more than seven times.
The Kurtosis value of 4 which is closed to 3 and the high Jarque-Bera test value of 74 shows
normal distribution of the data set.

From the statistics, it can be deduced that in Bursa Malaysia which is an emerging
market, there has been wealth gains from Spin-offs. In addition, wealth garnered from the spin-
off companies are more certain and greater in absolute terms than that of the parent companies in
general.

Spin-off Announcement and Ex-Date Effects

Table 3: Risk Adjusted Mean Abnormal Returns surrounding the Spin-off Announcement for the
parent companies, Bursa Malaysia, 1986 to 2002

Abnormal Returns Cumulative

Abnormal Returns
Mean Percentage Mean
Interval Days (t-value) Median Positive (t-value)

-50 to -2 0.091 0.554 77% 0.176

(1.551)* (0.340)
-1 to 0 1.795 1.793 86% 0.227
(1.933)* (0.278)
+1 to +50 0.153 0.652 79% 0.266
(0.689) (0.245)

Significant at 0.1 (*), 0.05 (**) and 0.01 (***) levels

13
 Figure 1: Plot of CAR using the risk-adjusted model for the period day –100 through +50 for the
parent companies relative to the announcement date, Bursa Malaysia, 1986 to 2002; n=85

Cumulative
returns (%) Cumulative Abnormal Returns (Risk adjusted)

35%

30%

25%

20%

15%

10%

5%

0%
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 +01 +11 +21 +31 +41
100 Days before and 50 Days after announcement date

Figure 2: Plot of CAR using the market risk-adjusted model for the period day –100 through +50 for
the parent companies relative to the announcement date, Bursa Malaysia, 1986 to 2002;n=85

Cumulative Cumulative Abnormal Returns (Market Risk Adjusted)

Returns (%)
45%
40%
35%
30%
25%

20%
15%
10%
5%
0%
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 +10 +20 +30 +40 +50
100 Days before and 50 Days after Announcement Date

14
Figure 3: Plot of CAR using the control sample-adjusted model for the period day –100 through day
+50 for the parent companies relative to the announcement date, Bursa Malaysia, 1986 to 2002; n=85

Cumulative Cumulative Abnormal Returns (Control Sample Risk)

Returns

25%

20%

15%

10%

5%

0%
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 +10 +20 +30 +40 +50

100 Days before and 50 after Announcement Date

Figure 4: Plot of CAR for the period day of Spin-off companies listing to +50,
Bursa Malaysia, 1986 to 2002; n=85

Cumulative Cumulative Abnormal Returns (Spin Off Co)

Returns (%)

55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
0 +05 +10 +15 +20 +25 +30 +35 +40 +45 +50

50 Days After the Listing Date

15
 The CAR trend of the two entities, the parent company and the spun-off company during
the analysis period is the same i.e. upwards. The market reacted to the Spin-off announcement
for both entities. However, the reaction is not significant during the announcement day but at
various days during the analysis period. This phenomena is consistent to a study of stock price
reaction to share repurchases in Malaysia Lim and Obiyathulla (2002). However, in a study of
the impact of Accounting Earnings disclosure on stock prices in Malaysia Cheng (2000), the
market reaction is significant during the announcement day and the two days surrounding it.
These findings can be explained by the familiarity of the market participants towards Spin-offs
and Share repurchases, which is less understood than earnings. In any case, they interpreted these
phenomena as good news but reacted not immediately on announcement of Spin-offs and share
repurchases than in the case of earnings.

As there is no regular interval between the date of announcement and the date of listing,
which is the official date of spin-off, the abnormal returns of the spun-off companies are kept
separated in analyzing the shareholders wealth effect. In Malaysia, most spun-off companies
took two to three months to list their companies after announcing to the public. However, there
were incidences that listing was only done after 4 years.

It is pertinent to stress here that in Malaysia, the government-controlled firms may spin-
off their subsidiaries because they want to tow the socio-economic aspirations of the New
Economic Policy13 and the later National Development Policy aiming to redistribute the
ownership of equity capital investments amongst various ethnic groups.

Following the reason often advanced for a spin-off that the parent company wants to
reduce the diversity of its business operations, the parent spins off the subsidiary because its core
business is very different from that of the rest of the parent’s operations. Focus may be a
determinant of Spin-off. In most efficient economies, resources flow to where they are best
utilized for the benefit of society. Therefore, since material resources are generally scarce and

13
Malaysia’s New Economic Policy (NEP), first established in 1971, seeks to eradicate poverty and end
the identification of economic function with ethnicity. In particular, it was designed to enhance the
economic standing of ethnic Malays and other indigenous peoples (collectively known as “bumiputeras” in
Bahasa Malaysia, the National Language of Malaysia). Rapid growth through the mid-1990s made it
possible to expand the share of the economy for bumiputeras without reducing the economic attainment of
other groups. One controversial NEP goal was to alter the pattern of ownership of corporate equity in
Malaysia, with the government providing funds to purchase foreign-owned shareholdings on behalf of the
bumiputera population. In June 1991, after the NEP expired, the government unveiled its National
Development Policy, which contained many of the NEP’s objectives.

16
inequalities exist in entrepreneurial skills, some members of society will own means of
production while others will not, even though they may lose their focus to do so.

Owners of corporate organizations and their agents should understand that they are using
these resources to produce goods and services to improve the quality of life of society. Corporate
organizations are to use these resources efficiently for the benefit of the society. To the
consumer, efficiency means the product is of good quality, affordable and has the ability to
provide the services it was designed for. To move into a responsible position to carry out such
business philosophy, a company must be first be established. Hence, age of a company is offered
here in this study as a predictor to such a motive. Generally, the older a company, the more
establish she becomes.

Malaysian companies have been announcing Spin-off for the purposes of consolidating
efforts on core operations. The Genting Group’s spin-offs Resort World focuses on the casino
operations and the Tan Chong Group spinning-off its spare-parts division are good examples.
Such Spin-offs may benefit the parent company in three primary ways:

1. The parent company may be better able to concentrate on its managerial, personnel,
distributional and production resources in one or a small number of operational
areas.
2. Spinning off areas of operations unrelated to the parent company’s core business
will decrease diversification. This decrease will raise the firm’s volatility of
earnings and subsequently, increase the value of the leveraged firm.
3. Spinning off the company into multiple operating units will enable investors to
purchase just those operations which will provide a proper fit into their own
portfolios. This “clientele” effect may serve to increase the total value of the
company.

During the 1990s, some of the largest public companies have spun-off major chunks of
their assets in an effort to increase their share values. Reversing their efforts towards
conglomerate formation begun in the 1980s and continued into the early 1990s, Berjaya Group
Bhd spun-off into three distinct companies, Berjaya Capital Bhd, Cosway Corporation Bhd and
Nam Fatt Corporation Bhd. The conglomerate Sunway Holding Incorporation Bhd separated
Sunway Building Technology Bhd when it spun-off this division. YTL Corporation Bhd, in a

17
more conventional manner, spun-off its’ YTL Cement Bhd. At this writing, Telekom Bhd is
planning to spin-off its subsidiary Celcom Bhd after acquiring the unit two years earlier. From
the above mentioned Spin-off cases involving large companies, it can be seen that Market
Capitalization can be a factor to Spin-off.

Under certain circumstances, spin-off can reduce the overall tax burden of a corporation.
That is to say that the combined taxes of the parent and spin-off company being less than the
taxes of the parent prior to the spin-off. This is because the spin-off can derive tax benefit from
unused capital allowance and investment tax credit . Spin-off activity can prevent the permanent
loss of tax credits that would otherwise accrue to companies with negative incomes. Companies
losing money frequently cannot benefit from tax credits. Spinning-off such firms to contract with
profit making firms can create value by preventing the permanent loss of such credits. There are
situations that exist where after the spin-off, it can be more highly geared, thus reducing it’s
overall tax amount. However, tax gains cannot be realized more than the case of mergers and
acquisitions as there is no group relief for tax i.e. each entity is tax separately in Malaysia.

There can still be a number of rationale to the increasing Spin-off activity. Spin-off
increases Shareholders wealth, presumably at the expense of the Bondholders wealth though no
evidence can be forwarded. The resultant increase in stability can also increase a company’s
borrowing capacity. These extemporaneous factors are not included in the regression model in
view of their ambiguity as outlined in previous studies. Hite and Owers (1983), Schipper & Smith
(1983)

18
Regression Analysis

Table 4: Descriptive Statistics of Focus, Tax, Market Capitalization and Age

Focus Tax Market Age

Capitalization

Mean 0.289474 0.302632 8.700774 2.329330

Standard Error 0.164113 0.177076 7.905258 24.35138
Median 0 0 8.705606 2.439330
Standard Deviation 0.456532 0.462450 0.525041 0.347751
Sample Variance 0.208421 0.21386 0.275668 0.120931
Kurtosis 1.861953 1.738310 -0.277379 7.086336
Skewness 0.928414 0.859250 -0.277379 -1.930480
Minimum 0 0 7.230238 0.903090
Maximum 1 1 9.957892 2.758155
Jarque Bera 75 26 19 3
Count 85 85 85 85

The median for the variables of Focus and Tax were 0 because dummy figures of 1 and 0
were used. Following the same note, minimum and maximum figures of 0 and 1 are used for
Focus and Tax respectively. As for the Market Capitalization and Age, the median is not far from
the mean indicating that the related values are quite close in absolute amounts. Here, the large
absolute values for Market Capitalization were in Common Logarithm for accuracy and
simplicity reasons. Except for the age variable where the Kurtosis value is very large and the
Jarque-Bera test value is small, the statistics for all the variables shows normal distribution of the
data set as the Kurtosis value is closed to 3 and the Jarque-Bera test records a high value.

19
 Table 5: Summary of causal relations of explanatory variables to CAR
for Parent Companies, Bursa Malaysia, 1986 to 2002; n=85

Effect on Dependent Variable: CAR interval

Coefficient
(t-value)

Interval -1 to 0 0 0 to +1 -1 to +1 -5 to +5

Variable
Focus 0.607 0.455 0.332 0.560 0.110
(0.682) (0.531) (0.403) (0.682) (0.275)

Tax 0.506 -0.037 0.065 0.013 0.022

(0.730) (-0.052) (0.087) (0.028) (0.031)

Capitalization 7.591 6.721 6.328 5.190 4.091

(11.58***) (8.678***) (8.168***) (7.253***) (5.960***)

Age -7.345 -2.001 -1.530 -0.706 -0.156

(-0.035) (-2.154***) (-1.647) (-0.978) (-0.265)

Regression Model

R -squared 0.639 0.762 0.905 0.704 0.341

Adjusted R Squared 0.619 0.740 0.900 0.688 0.305

S.E. of Regression 2.728 2.644 0.390 0.100 0.160

F- Statistic 31.967 35.188 13.011 5.706 8.549

Probability (F-statistic) 0.000 0.000 0.000 0.000 0.000

Durbin-Watson Statistic 1.801 1.673 1.678 1.696 2.750

Note: Significant at 0.05 (*), 0.01 (**) and 0.001 (***) levels

20
 Table 6: Summary of causal relations of explanatory variables to CAR
for Spin-off Companies, Bursa Malaysia, 1986 to 2002; n=85

Effect on Dependent Variable: CAR interval

Coefficient
(t-value)

-1 to 0 0 0 to +1 -1 to +1 -5 to +5

Variable
Focus 0.652 0.332 0.392 0.503 0.453
(0.732) (0.510) (0.572) (0.670) (0.505)

Tax 0.240 0.670 0.850 0.166 0.135

(0.614) (0.930) (1.409) (0.251) (0.148)

Capitalization 0.175 0.255 0.172 0.140 0.045

(0.155) (0.331) (0.324) (0.191) (0.057)

Age 1.920 0.740 0.561 0.120 0.863

(2.068***) (1.089) (0.826) (1.380) (0.125)

Regression Model

R -squared 0.709 0.596 0.826 0.704 0.657

Adjusted R Squared 0.687 0.556 0.797 0.688 0.635

S.E. of Regression 1.070 2.644 0.820 0.609 0.420

F-statistic 33.590 17.103 30.874 11.362 35.907

Probability (F-statistic) 0.000 0.000 0.000 0.000 0.000

Durbin-Watson Statistic 1.891 1.965 1.704 1.932 1.872

Note: Significant at 0.05 (*), 0.01 (**) and 0.001 (***) levels

From the tabulation of the regression results in Tables 5 and 6, it can be deduced that the
regression methodology is valid. The coefficient of determination, R-squared and adjusted R-
squared of average 70 percent shows high incidences the sample regression line fits the data. The
F-statistic was found to be significant as the Probability was 0. Thus, the regression model is
valid and there is no risk in rejecting the Null Hypothesis. The Durbin-Watson test values which
were more than 1.65 indicated that there is no first-order autocorrelation in the regression. Also,

21
with the Durbin-Watson test values exceeding 1.65, the statistics can accurately explained more
than 66 percent changes in the CAR found in the study.

On the independent variables, Tax and Focus were not statistically significant whereas
the Market Capitalization and the Age of the firm indicated a significant relationship with the
CAR. Unlike prior studies by Hite and Owers (1983), Veld and Merkoulova (2003), focus factor
is not relevant in the level of information on Spin-off announcement. The same goes to Tax
factor, it does not appeared as a predictor even though it is well taken as a determinant in prior
studies in the United States market Hite and Owers (1983), Copeland, Lemgruber and Mayers
(1987). This is an agreement to the argument14 that Malaysia has no specific tax regulations on
Spin-off and does not practice group tax loss relief. The regulations that were used for guidance
for Spin-off confined to listed companies listing their subsidiaries and RPGT concerns for
transferor transferring shares in Land-based companies.

The regressions as shown in Table 5 and 6 show the higher the Market Capitalization, the
higher the CAR. This result is conforming to the experience of the United States studies: Schipper
and Smith (1983) Hite and Owers (1983) Copeland, Lemgruber and Mayer (1987) Kudla and
McInish (1988) Krishnaswami and Subramaniam (1999).

Generally, market capitalization grows with the age of a company in that the longer
hence, frequently more established the company becomes, it’s market capitalization increases as
well. If this case is prevailing in this study, then it will give rise to high correlation between the
variables, capitalization and age. In order to ensure that the regression analysis is not affected by
multicollinearity problems caused by these two variables, extended effort has been taken to
regress CAR again without either one of the two variables. Second regression is performed
without the age variable and third regression is done without the capitalization variable.
However, the results of the second and third regressions show no differences with the initial
regression output in Table 5 and 6.15 Therefore, the initial regression results where the four
independent variables were regressed contemporaneously are retained

14
The argument offered here is that there is an absence of tax motivation for spin-off in the Malaysia
compared to the United States. See Appendix A and B for the legal framework in these countries.
15
The results of these second and third regressions can be referred in Appendix C, D, E and F.

22
 The Market Capitalization factor can be supported by Freeman (1987)’s argument that
larger firms provide a greater variety of information than smaller firms and larger firms have
greater exposure in the media. Large firms are more likely to have additional information
reported in the form of interim financial reports, analyst forecasts, industry forecasts,
management forecasts and even litigation. Another explanation is that trading by informed
investors reveals private information. Atiase (1985) argued that the partial revelation of private
information by informed investors reduces the potential for profits in small firms to a greater
extent because private information is more noticeable in thinly traded stocks. This factor limits
the potential to exploit the knowledge of a misinformation in a small firm, and is added incentive
to undertake research on large firms rather than small firms. Institutional investors are likely to
concentrate on large firms due to liquidity constraints. For example, institutions cannot hold a
large percentage of stock of a small firm and expect to be able to sell the stock immediately
without price discounts. Further, because institutions are a major source of demand for
information, financial analysts may concentrate their search activities on larger firms.

In the case of the Age variable, and referring to Table 6, for the parent companies, the age
is negatively correlated to the CAR i.e. the longer the Age, the lower the CAR and vice-versa.
However, as shown in Table 7, for the Spin-off companies, the age is positively correlated to the
CAR. i.e. the longer the Age, the higher the CAR. Here it can be deduced that high premium is
attached to shorter aged companies when they spin-off their subsidiaries. This is complimenting
the Finance theory that a higher risk premium is required for less established companies which
have a shorter age.

Summary

In this study, we analyzed a sample of 85 parent companies and their Spin-off business
units from Bursa Malaysia that were announced between January 1986 and December 2002. The
average CAR over the 150 days event window was more than 20 percent for the parent
companies and more than 25 percent for the spun-off companies. The trend of the abnormal
returns charted in the study shows that the wealth performance in Malaysian Spin-off are long
term in perspective as upward trends continue after fifty days.

Tax, Age, Market Capitalization and Focus factors were considered as possible
determinants of Spin-off performance. The study reveals that Market Capitalization and Age

23
factors are significant to the market price variation. The CAR surrounding the spin-off
announcement day is positively interrelated to the Market Capitalization but negatively correlated
to the age.

24
 REFERENCE

Ariff M (1996) “Effect of Financial Liberalization on Four Southeast Asian Financial Markets
1973 –1994” ASEAN Economc Bulletin 12 325-338
Ariff M & Johnson L W (1990) “Securities Markets and Stock Pricing Evidence in a Developing
Equity Market in Asia” Longman Professional Books, London, Singapore and Sydney
Annuar M N, Ariff M & Shamsher (1994) “Is Kuala Lumpur’s Emerging Share Market
Efficient?” Journal of International Financial Markets, Institutions and Money (4) 2 89-100
Atiase R (1985) “Pre-disclosure Information, Firm Capitalization and Security Price Behavior
around Earnings Announcement” Journal of Accounting Research 23
Barry C B, Peavy J W, & Rodriguez M (1997) “Performance Characteristic of Emerging Capital
Markets” Emerging Markets Quarterly (Spring) 41-48
Bradley M, Desai A & Kim E H (1988) “Synergistic Gains From Corporate Acquisitions and
their Division between The Stockholders of Target and Acquiring Firms” Journal of Financial
Economics 21 3-40
Brown & Warner (1980) “Measuring Securities Price Performance” Journal of Financial
Economics 8 205-208
Brown S J & Warner J B (1985) “Using Stock Returns The Case of Event Studies” Journal of
Financial Economics 14 3-31
Cheng F F (2000) “ The Impact of Accounting Earnings Disclosures on Stock Prices in Malaysia,
an Emerging Market” Ph.D Thesis, Universiti Putra Malaysia
Copeland T, Lemgruber E F & Mayers D (1987) “Corporate Spin-Offs: Multiple Announcement
and Ex-Date Abnormal Performance” Modern Finance and Industrial Economics, Chapter 7 T E
Copeland, ed. New York: Basil Blackwell Press
Cusatis PJ, J A Miles & J R Woolridge (1993) “Restructuring through spin-offs” Journal of
Finance Economics 33 293-311
Fama, Eugene (1980) “Agency Problems and the Theory of the Firm,” Journal of Political
Economy, vol 88, 288 – 307
Fama, Fisher & Roll (1969) “The Adjustment of Stock Prices to New Information” International
Economic Review 1-21
Fama (1970) “Efficient Capital Markets: A Review of Theory and Empirical Work” Journal of
Finance 383-417
Freeman R N (1987) “The Association between Accounting Earnings and Security Returns for
Large and Small Firms” Journal of Accounting and Economics
Gilson S C, Healy P M, Noe C F & Palepu K G (1998) “Information Effects of Spin-offs, Equity
Carveouts and Targeted Stock Offerings” Working Paper, Harvard Business School
Government of Malaysia “The Companies Act of Malaysia 1965” Government Printers
Government of Malaysia “The Real Property Gains Tax Act 1976” Government Printers
Galai D & Masulis R (1976) “The Option Pricing Model and the Risk Factor of Stock” Journal
of Financial Economics 3 53-82
Habib M A, Johnsen D B & Naik N Y (1997) “Spin-offs and Information” Working Paper,
London Business School
Healy, P & Palepu K (1995) “The challenges of investor communication: The case of CUC
International, Inc” Journal of Financial Economics 38, 111-140
Hite G L & Owers J E (1983) “Security Price Reactions around Corporate Spin-Off
Announcement” Journal of Financial Economics 12 409-436
Jensen M & W Meckling (1976) “Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure” Journal of Financial Economics 3 305-360
Johnson & Klein (1996) “The effects of Spin-Offs on Corporate Investment and Performance”
The Journal of Financial Research 19 2 293-307

25
John T A (1993) “Optimality of Spin-Off and Allocation of Debt” Journal of Financial
Quantitative Analysis 28 139-160
Katherin Schipper & Abbie Smith (1983) “Effects of Recontracting on Shareholder Wealth - The
Case of Voluntary Spin-offs” Journal of Financial Economics 12 437-467
Klein A (1986) “The Timing and Substance of Divestiture Announcements: Individual,
simultaneous and Cumulative Effects” The Journal of Finance 41 (July): 685-697
Krishnaswami S & Subramaniam (1999) “ Information Asymmetry, Valuation, and the
Corporate Spin-offs Decision” Journal of Financial Economics 53 73-112
Kuala Lumpur Stock Exchange “Companies Handbook” Volume 1-3
Kudla R J & Mclnish T H (1983) “Valuation Consequences of Corporate Spin-Offs” Review of
Business and Economic Research 71-77
Kudla R J & McInish T H (1988) “Divergence of Opinion and Corporate Spin-offs” Quarterly
Review of Economics and Business 28 2 20-29
Lim E H & Obiyathulla I B (2002) “Price Reaction to Stock Repurchase; Evidence from the
KLSE” Working Paper, International Islamic University Malaysia
Miles & Rosenfeld (1983) “The Effect of Voluntary Spin-Off Announcements on Shareholder
Wealth” Journal of Finance 38 5 1597-1606
Mohamad M H (1995) “Capital Structure in Large Malaysian Companies” Management
International Review (35) 2 119-30
Murray L (2000) “An assessment of the wealth effects of spin-offs on the London Stock
Exchange” Working Paper, University College Dublin
Parrino R (1997) “Spin-offs and Wealth Transfers: The Marriott Case” Journal of Financial
Economics 43 241-274
Paul M Healy, Palepu & Ruback (1992) “Does Corporate performance Improve After Mergers?”
Journal of Financial Economics 31 135-175
Parrino R & Weisbach M S, (1999) “Measuring investment distortions arising from stockholder-
bondholder conflicts” Journal of Financial Economics (53) 1 3-42
Schipper K & Smith A (1983) “Effects of recontracting on Shareholder Wealth: The Case of
Voluntary Spin-offs” Journal of Financial Economics 12 437-467
Seward J & Walsh J (1996) “The Governance and Control of Voluntary Corporate Spin-offs”
Strategic Management Journal 17 25-39
Sharpe W F (1963) “Capital Asset Prices: A Theory of Market Equilibrium under Condition of
Risks” Journal of Finance 3 309-327
Slovin M B, Sushka M E & Ferraro S R, (1995) “A comparison of the information conveyed by
equity carve-outs, spin-offs and asset sell-offs” Journal of Financial Economics (37) 1 89-104
Uddin M H & Ariff M (1998) “Revaluation Effect on the Parent and the Spin-Off Firms from
Divestiture Decision” An unpublished Manuscript, The National University of Singapore and
Monash University, Melbourne, Australia
Vijh A M (1994) “The Spin-off and Merger Ex-Date Effects” Journal of Finance 19 (2): 581-
609
Vroom H J & Frederikslist R (2001) “Shareholder Wealth Effects of Corporate Spin-offs: The
Worldwide Experience 1990-1998” Unpublished Manuscript, Erasmus University Rotterdam
Wruck E & Wruck K (1996) “Codependent No More? How Spin-offs Affect Parent and Spin-
off Firms’ Performance” Working Paper, Harvard University
Wruck E & Wruck K (2002) “Restructuring Top Management: Evidence from Corporate Spin-
offs” Journal of Labor Economics 20 176-218

26
 APPENDIX A

Key requirements of Spin-off of a Listed Company

and Real Property Company, : Malaysia

1. Profitability of Parent

The pretax profits, profits after tax and net tangible assets of the subsidiary or associated
company to be listed should not account for more than 35 percent respectively of the
consolidated pretax profits, profits after tax and net tangible assets of the Group in respect
of the past five years for a Main Board listing or three years for a Second Board listing. In
addition, if the consolidated pretax profit of the holding company is reduced by more than
15 percent in the financial year following that in which the subsidiary or associated
company is listed, the parent company, consequently upon listing of its subsidiary or
associated company, will have to make good the shortfall within six months in the
following year, failing which the parent company will be suspended;

2. Capital Issuing Committee (CIC)

The parent company excluding the subsidiary or associated company to be listed and
existing listed subsidiary or associated companies should on its own meet CIC’s
requirements for listing as if it were a new company seeking listing.

3. Separate Business

The applicant subsidiary or associated company should be involved in a particular business

of its own with profits able to meet CIC’s criteria for listing with respect to track record and
future prospects;

4. No Intra-Group Competition

The relationship. between the subsidiary or associated company seeking listing and the
other companies within the group, including the parent company, should not give rise to
intra-group competition or conflict of interest situation.

27
5. Independence

The subsidiary or associated company to be listed should demonstrate that it is not overly
dependent on the other companies within the Group, including the parent company, in
terms of its operations, including purchases and sales of goods, management policies and
finance;

6. Real Property Companies

Prior to 1997, Real Property Company (RPC) shares are deemed to be acquired on the date
the relevant company becomes a real property company or on the date of acquisition of the
RPC shares, whichever is later. If the relevant company acquires additional real property
or shares or both equivalent to 50 percent or more than those which it already owns, the
date of acquisition of the RPC shares will shift forward to the date of acquisition of the
additional real property or shares. After 1997, the deemed date of acquisition of RPC
shares will no longer shift forward on purchase of additional real property or shares. If at
that date of acquisition of shares, the relevant company was already a RPC, the deemed
acquisition price will be either the consideration paid together with the incidental costs for
the RPC shares or the deemed market value of the RPC shares in the event that the shares
were not acquired at arms length. The acquisition price of bonus RPC shares will be zero
since no consideration has been paid for the shares. However, the acquisition price of
shares acquired through right issues will be the consideration paid for the rights issue. The
new rule after 1997 may be unfair to disposers of RPC shares if the appreciation in value of
the shares is not due solely to appreciation in value of the underlying property but to the
retention of profits in the RPC and appreciation of other properties purchased subsequent to
the date of acquisition of the RPC shares.

28
 APPENDIX B

Key requirements of Tax-free Spin-off, United States

1. Controlled Corporation

To qualify as a tax-free spin-off, the distributing corporation must distribute the stock of
a controlled corporation preexisting or newly created to its shareholders. Provided the
companies meet the active business requirement (see requirement 3 below), the
distributing corporation has significant latitude in the assets it transfers to the controlled
corporation. For purposes of this requirement, control is defined as owning at least 80
percent of the voting power and at least 80 percent of the shares of each class of
nonvoting stock.

2. Securities Distribution

The distributing corporation generally must distribute all its controlled corporation stock
and securities immediately before the transaction. Revenue procedure 96-30, however,
allows the distributing corporation to retain a limited amount of the stock or securities if
the stock is widely held, the retention satisfies a significant business purpose, the
controlled corporation officers and directors are officers and directors of the distribution
corporation, the retained stock and securities are disposed of as soon as possible but no
later than five years after the separation and the distributing corporation votes the
retained stock in the same proportion as the stock distributed. In all cases, stock meeting
the control definition must be distributed.

3. Active Businesses

Following the distribution, both the controlled and distributing corporations must be
actively engaged in a trade or business with a five-year history. Regulations section
1.355-3(b) defines an active trade or business as one in which all the necessary steps or
activities take place to earn a profit. An active business does not include ownership of
investments such as stock or land or the leasing of real or personal property unless the
corporation provides significant services related to the property.

29
4. Not A Distributing Device

Neither the distributing nor the controlled corporation can use the spin-off as a device for
distributing earnings and profits. Because of its vagueness, this requirement usually is
the most troublesome. The key issue is whether the spin-off is indistinguishable from an
ordinary dividend. Regulations section 1.355 –2 (d) tries to help by listing factors that
indicate when the spin-off (or other corporate division) is or is not a device for
distributing earnings. A spin-off starts with one strike against it: The first device factor is
“pro rata distribution,” the very essence of a spin-off. Regulations section 1.355-2 (d)(5),
however, discusses distributions that have no tax avoidance potential and thus may
satisfy the device requirement even if one or more device factors are present. For
example, a distribution ordinarily would not be a device if the distributing and controlled
corporations have no accumulated earnings and profits.

4. Business Purpose

Regulations section 1.355-2(b) requires a spin-off to be “motivated, in whole or

substantial part, by one or more corporate business purposes.” The purposes must be
“real and substantial” and “germane” to the distributing or controlled corporation’s
business or to the affiliated group of which the distributing corporation is a member.
Neither reducing federal income taxes nor satisfying a shareholder purpose is a corporate
business purpose. However, a distribution made primarily to achieve a corporate
business that also achieves a shareholder purpose is not disqualified. A corporate
business purpose also fails the test if it could be accomplished in a nontaxable transaction
that is not “impractical or unduly expensive.”

The subjectivity inherent in the above rules, as well as intense IRS scrutiny, has made the
business purpose requirement one of the most difficult hurdles a company must overcome
to ensure tax-free treatment. The revenue procedure 96-30 removes some of the
subjectivity by discussing at length the qualifying criteria and the information companies
must submit for advance rulings for each of nine business purposes that may qualify a
spin-off for tax-free treatment.

30
6. Continuity Of Interest

Regulations section 1.355-2 (c) says that following the distribution of the controlled
corporation’s stock, the distributing corporation shareholders must maintain continuity of
interest in both companies. Revenue procedure 96-30 further says this requirement
generally is met if one or more persons who directly own the distributing corporation
before the distribution also own 50 percent or more of the stock in each of the modified
companies after the separation.

31
 APPENDIX C

Second Regression Summary of causal relations of explanatory variables to CAR

for Parent Companies, Bursa Malaysia, 1986 to 2002; n=85

Effect on Dependent Variable: CAR interval

Coefficient
(t-value)

Interval -1 to 0 0 0 to +1 -1 to +1 -5 to +5

Variable
Focus 0.704 0.825 0.956 0.317 0.518
(0.761) (0.917) (1.530) (0.387) (0.470)

Tax 0.505 0.429 0.867 (0.710 0.732

(0.735) (0.561) (1.065) (0.734) (0.985)

Capitalization 6.585 4.742 2.090 5.409 4.083

(11.19***) (5.613***) (2.642***) (6.153***) (5.092***)

Regression Model

R -squared 0.639 0.785 0.643 0.707 0.976

Adjusted R Squared 0.624 0.620 0.603 0.689 0.964

S.E. of Regression 2.709 1.073 2.462 3.754 6.030

F- Statistic 43.21 42.77 3.475 10.863 12.751

Probability (F-statistic) 0.000 0.000 0.000 0.000 0.000

Durbin-Watson Statistic 1.870 1.825 2.526 1.738 2.571

Note: Significant at 0.05 (*), 0.01 (**) and 0.001 (***) levels

32
 APPENDIX D

Third Regression Summary of causal relations of explanatory variables to CAR

for Parent Companies, Bursa Malaysia, 1986 to 2002; n=85

Effect on Dependent Variable: CAR interval

Coefficient
(t-value)

Interval -1 to 0 0 0 to +1 -1 to +1 -5 to +5

Variable
Focus 0.516 0.775 0.693 0.511 0.581
(0.675) (0.832) (0.567) (0.673) (0.470)

Tax 0.670 0.378 0.732 0.504 0.993

(0.728) (0.540) (0.640) (0.734) (0.795)

Age -0.716 -0.732 -0.961 -0.430 -0.519

(-0.753) (-2.688***) (-0.825) (-0.609) (-0.482)

Regression Model

R -squared 0.705 0.914 0.814 0.486 0.994

Adjusted R Squared 0.692 0.865 0.809 0.420 0.397

S.E. of Regression 1.560 5.919 7.637 1.003 4.968

F- Statistic 10.721 13.112 8.401 18.216 22.45

Probability (F-statistic) 0.000 0.000 0.000 0.000 0.000

Durbin-Watson Statistic 1.838 2.568 2.027 1.677 1.804

Note: Significant at 0.05 (*), 0.01 (**) and 0.001 (***) levels

33
 APPENDIX E

Second Regression Summary of causal relations of explanatory variables to CAR

for Spin-off Companies, Bursa Malaysia, 1986 to 2002; n=85

Effect on Dependent Variable: CAR interval

Coefficient
(t-value)

-1 to 0 0 0 to +1 -1 to +1 -5 to +5

Variable
Focus 0.743 0.852 0.563 0.768 0.603
(0.808) (0.967) (0.619) (0.809) (0.688)

Tax 0.632 0.721 0.590 0.549 0.742

(0.757) (0.796) (1.612) (0.619) (0.865)

Capitalization 2.065 4.317 2.922 1.045 1.303

(2.643***) (6.221***) (3.643***) (1.612*) (1.825*)

Regression Model

R -squared 0.635 0.856 0.759 0.560 0.408

Adjusted R Squared 0.618 0.821 0.732 0.477 0.384

S.E. of Regression 11.891 16.334 10.930 12.681 8.064

F-statistic 41.492 42.203 11.347 10.806 16.07

Probability (F-statistic) 0.000 0.000 0.000 0.000 0.000

Durbin-Watson Statistic 2.054 1.852 1.745 1.689 1.845

Note: Significant at 0.05 (*), 0.01 (**) and 0.001 (***) levels

34
 APPENDIX F

Third Regression Summary of causal relations of explanatory variables to CAR

for Spin-off Companies, Bursa Malaysia, 1986 to 2002; n=85

Effect on Dependent Variable: CAR interval

Coefficient
(t-value)

-1 to 0 0 0 to +1 -1 to +1 -5 to +5

Variable
Focus 0.636 0.853 0.665 0.750 0.782
(0.711) (0.925) (0.784) (0.759) (0.801)

Tax 0.652 0.724 0.543 0.541 0.730

(0.717) (0.850) (0.619) (0.601) (0.769)

Age 2.781 0.831 0.577 0.819 0.845

(2.825***) (0.912) (0.602) (0.864) (0.967)

Regression Model

R -squared 0.564 0.759 0.870 0.635 0.640

Adjusted R Squared 0.513 0.645 0.829 0.608 0.629

S.E. of Regression 2.302 2.694 2.773 3.511 1.004

F-statistic 24.218 13.775 31.905 10.806 24.612

Probability (F-statistic) 0.000 0.000 0.000 0.000 0.000

Durbin-Watson Statistic 1.538 2.062 3.147 1.792 2.688

Note: Significant at 0.05 (*), 0.01 (**) and 0.001 (***) levels

35