Spin-offs: Tax Comparison with an Asset Sale

This paper examines a puzzle in corporate restructurings; given the tax benefits associated with spin-offs, why do we observe so few of them? If a divestiture could qualify as either an asset sale or a spin-off, we would expect, in the absence of nontax factors, that a company facing a positive tax rate would choose a non-taxable spin-off when the assets to be divested have an unrealized taxable gain and a taxable sale when the assets have an unrealized tax deductible loss. However, we find tha non-tax considerations must play a considerable role in the divestiture decision because of the predominance of tax inefficient sales in the face of considerable tax costs. We find that firms choose tax inefficient asset sales when they need financial reporting earnings and when they need cash.