A Comparison of Sell-off and Spin-off strategies and a discussion on feasibility of Spin-offs in China's security market

Sell-offs and Spin-offs are most common methods for firms to divest divisions and subsidiaries. They are driven by similar motives and have similar effect on the shareholders' wealth. However sell-offs are more often used to deal with financial distress and spin-offs to realize the fair values of shares. For the management team of parent firm, in sell-off operations, they sell assets for cash or cash equivalent which do not reduce the value of the assets that they control while in a spin-off they would control a lower level of assets. For the shareholders, after spin-offs, they can obtain two separate sets of shares which are expected to bring higher wealth value to them. In China's securities market, divestiture cases have been gradually increasing. Most of them are sell-offs. There are no spin-off cases. Such phenomenon may be resulted from the earnings management focus of divestiture as well as historical constraints imposed by the government agencies. In reality, there are no such restrictive clauses in laws and regulations. With the evolving of the ownership structure, and changes and improvement with the initial public offering (IPO) supervision mechanism, the management has been paying more attention to the shareholders' wealth, spin-offs in stock market is expected to emerge.