Abstract
This paper argues that investor sentiment affects the market reaction to spinoff announcements. It further proposes a catering theory for corporate spinoff decisions. This theory points out that a firm's manager may observe a prevailing strong investor demand for corporate focus or glamour stocks, then rationally cater to investor demand by spinning off the unrelated business or the subsidiary business which is currently more attractive to the stock market than the parent business. Such catering-motivated spinoffs will experience higher stock returns at the announcement dates than other types of spinoffs. However, they may not benefit shareholders in the long run since their primary goal is to maximise the firm's short-run share prices rather than to improve a firm's operating efficiency.
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