We examine corporate investment efficiency and managerial focus established after spin-offs. Our results show that investment efficiency, measured by investment sensitivity with respect to investment opportunity, in parent firms substantially deteriorates after spin-offs when their top management holds a top management position in the spun-offs (i.e., overlapped management). This destructive effect is more prevalent when the parent firms exercise suboptimal control over the spun-offs in different industries or geographically distant locations and when they present a weak corporate governance structure. We interpret this result as evidence that shareholders benefit from corporate spin-offs through complete separation of the parent firms in management as well as in ownership.

JEL classification: G30, G34

Keywords: Spin-offs; managerial focus; overlapped management; investment sensitivity