For example, the market capitalization may be too small, a comparable company may already be represented in the portfolio, or the fund may be constrained by indexing requirements. This lack of initial sponsorship often creates a vacuum of downward pressure on the share price not attributable to business fundamentals. In effect, there is a temporary inefficiency that can be captured by astute investors. When one reconstitutes that parent and spin-off after a one to two year period, often outstanding overall returns are observed. The combination of accountability, responsibility and more direct incentives take their natural course.
Managers have greater freedom to pursue new ventures, streamline production, and pare overhead.
After the spin-off, stock options can more directly compensate management. This often leads to improved operating performance.