This paper examines corporate governance and its impact on corporate performance in
spin-offs. A spin-off is classified by its governance structure: whether or not spun-
off firms are operationally controlled by parent managers after a spin-off. This
classification is found to be useful to distinguish between incentive (efficient
contract) and negative synergy hypothesis as a motivation behind spin-offs. We show
that differential stock market response and corporate performance in the two samples
are consistent with these hypotheses. Further, we examine the relation between
corporate performance and firm`s characteristics under alternative governance
structures in a spin-off. Finally, we identify firms’ characteristics which
determine the alternative internal managerial governance structures in a corporate
spin-off.
