We investigate the linkage between changes in firm value and changes in capital allocation efficiency resulting from dismantling internal capital markets via spinoffs. We find no evidence of wholesale misallocation of capital pre-spinoff. On the average, excess value increases following spinoffs. Furthermore, changes in excess value are positively linked to changes in capital allocational efficiency following spinoff. We find that spinoff announcement returns are greater (smaller) when the parent allocates capital to the unit to be spun off in a seemingly less (more) efficient manner. Divested division capital expenditures move toward industry levels after spinoff, regardless of their relative investment opportunities.

Institutional investors have become more active in corporate governance with the relaxation of Depression Era securities laws. The California Public Employees Retirement System (CalPERS) is a leading institutional activist. In this paper, we examine the relationship between CalPERS' public targeting and both short- and long-term stock returns to address what has been dubbed the “CalPERS effect.” Our results indicate evidence of an announcement effect and that, while there is also evidence of some long-term improvement, it is limited to 6 months from the announcement of the target list in the Wall Street Journal when more consistent empirical methodologies are employed.