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Executive Compensation and the Corporate Spin-Off Decision

We investigate the effect of CEO equity incentives on corporate spin-off decisions and find that CEOs with stronger equity incentives are, ceteris paribus, more likely to engage in corporate spin-offs (after correcting for potential endogeneity concerns). In addition to confirming previous findings that spin-offs are followed by positive announcement and long-run abnormal stock returns, we show that the level of the CEO's incentives matters. In particular, we find that while low incentive firms have a stronger announcement effect, high incentive firms experience better long run stock performance following spin-offs. This is consistent with the disciplining effect of spin-offs since low incentive firms are also found to have more independent boards. While a stronger board may be more influential on key corporate decisions (e.g., spin-offs), better incentive alignment leads to superior long run performance. Our results thus suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary in the long run.