Capital structure in corporate spin-offs

In a spin-off, the parent divides the assets of the firm and chooses the capital structure for the new, stand-alone entity. I therefore use this sample to investigate how firms determine their capital structure. I find that the subsidiary has a leverage ratio lower than the parent's but similar to that of a comparable nonspinoff firm. Growth opportunities are the primary determinant of the subsidiary's leverage. Profitability has no impact on leverage choice. These results support the predictions of the tradeoff theory of capital structure and provide insight into why previous studies find a negative relation between leverage and profitability.