16473: Spinning Before Change: How firms Remove Problematic Businesses Ahead of Shifting Societal Demands (session 26045)

The decision by a company’s management team to spin off a segment into a standalone company has traditionally been regarded as a financial strategy. However, this study introduces a new dimension: the role of social activism pressure, classified in the form of a declining company reputation. Our primary hypothesis posits that such pressure influences management's decision to execute a spinoff transaction involving the contested subsidiary. Additionally, we hypothesize that while the parent company’s reputation stabilizes following the spinoff, the reputation of the spinoff entity continues to deteriorate. Evidence from U.S. public corporate spinoffs suggests that management teams may strategically pursue the spinoff of a socially scrutinized asset as a means to protect the reputation of the remaining parent company. This move effectively isolates the reputational risk associated with the contested asset, allowing the parent company to preserve its standing while the spinoff entity bears the brunt of ongoing reputation challenges. Importantly, our findings account for financial considerations—traditionally viewed as the primary motivators behind spinoff decisions—while shedding light on the significant role of social factors in shaping corporate strategies. The spinoff thus emerges not only as a financial maneuver but also as a tool for reputational self-preservation.

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