Intra-Industry Spinoffs

Abstract

Develops a new theory of spinoffs that accounts forthe role of disagreements in the spinoff process. Unlike existing theories, thenew theory can explain the main statistical regularities concerning spinoffs,including why spinoffs often come out of leading firms and why they aresuperior performers. After an examination of the role of internal disagreements in the formationof spinoffs in the automobile and laser industries, a model of disagreementsand spinoffs is presented. In the model, it is shown that disagreements occurwithin firms when employees with superior information and abilities are unableto convince incumbent managers of the merit of their ideas. When thesedisagreements are of sufficient magnitude to justify the cost of creating a newfirm, they spawn spinoffs. In the model, which accommodates the observedinfluence of strategic disagreements (e.g., acquisitions and the first passageproblem), spinoffs are socially productive and reflect an inherent strength ofcapitalism. The study concludes with a discussion of the welfare implicationsof the model. (SAA)