Some interesting quant action today from Mac Bank on demergers:
Using an event study methodology, we calculated the cumulative excess returns 6 months before and 12 months after the demerger date for both the parent and child entity.
When the data is split up to examine the performance of the parent entity compared to the child entity we find that behaviour varies quite consistently. The child entity can underperform by up to 9% in the six months following a demerger. It is not until 12 months after the split that the child entity typically outperforms.
For the parent entity the performance is typically flat leading into a demerger. This is followed by market performance following the split.
We further examine the data by looking at the performance of the stock on the 1st day of trading. Of the 29 spin-offs in our dataset since 1995, 55% of the child entities had positive returns on the first day of trading (from open to close). This did not appear to impact the short term returns however in the longer run, those companies with negative returns typically underperformed and had greater dispersion of returns.
We also compare the performance based on turnover on the 1st trading day. Child entities with greater than 5% turnover typically outperformed in the two months following a split. These stocks outperform those with lower trading volume in both the long and short term.
Our test data only contained around 30 demergers therefore we must be wary of any conclusions made. It is worth noting however that whilst the sample set is small the pattern is consistent, i.e. there are no significant outliers.
In particular we recognize that many demergers have been in cyclical industries and the results might be related to the market cycle. However when comparing such stocks to respective industry performance there is still longer term outperformance of demerged entities.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
