Institutional Investor Preferences and Price Pressure: The Case of Corporate Spin-Offs

Corporate spin-offs create new firms with characteristics markedly different from the original firm. Consequently, institutional investors precommitted to certain investment styles or subject to fiduciary restrictions have incentives to rebalance their portfolios at the time of the spin-off. We find strong evidence that investment strategy and fiduciary restrictions affect institutional investor demand for stocks after spin-offs. However, contrary to prior research conjecturing that trading related to investor preferences creates short-term price pressure in entities emerging from spin-off transactions, we find that, in general, this trading is not associated with abnormal price movements for parents or subsidiaries around the spin-off.

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