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Equity Carve-Outs and Managerial Discretion


  • Jeffrey W. Allen

    (Cox School of Business, Southern Methodist University,)

  • John J. McConnell

    (Krannert School of Management, Purdue University)


This study proposes a managerial discretion hypothesis of equity carve-outs in which managers value control over assets and are reluctant to carve out subsidiaries. Thus, managers undertake carve-outs only when the firm is capital constrained. Consistent with this hypothesis, firms that carve out subsidiaries exhibit poor operating performance and high leverage prior to carve-outs. Also consistent with this hypothesis, in carve-outs wherein funds raised are used to pay down debt, the average excess stock return of + 6.63 percent is significantly greater than the average excess stock return of - 0.01 percent for carve-outs wherein funds are retained for investment purposes. Copyright The American Finance Association 1998.

Suggested Citation

  • Jeffrey W. Allen & John J. McConnell, 1998. "Equity Carve-Outs and Managerial Discretion," Journal of Finance, American Finance Association, vol. 53(1), pages 163-186, February.
  • Handle: RePEc:bla:jfinan:v:53:y:1998:i:1:p:163-186

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