Spin-offs or sell-offs: The dynamics of corporate divestitures

This study develops a real options model of corporate divestitures wherein firms choose the optimal timing and conditions for a spin-off or sell-off while accounting for the future growth of new business units. The choice of divestiture method is affected by the risk and growth prospects of the divested assets. The higher the risk or growth prospect, the more likely firms tend to choose a relatively higher-cost method for divestiture. Tax costs of sell-offs also affect the choice of divestiture method. There is a U-shaped relationship between the tax rate and the incentive to divest with a sell-off.