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Deciphering the Motives for Equity Carve-Outs

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  • Eric A. Powers

Abstract

I analyze 181 equity carve-outs to determine whether the transactions are motivated by potential efficiency improvements or by an opportunity to sell overvalued equity. Carve-out operating performance peaks at issue, declining significantly thereafter. Parents sell a greater percentage of shares when subsequent performance is poor. A negative relation also exists between long-term excess returns and the percentage of shares sold. If subsequent performance is correlated with the degree to which parent managers believe carve-out subsidiaries are over- or undervalued, results imply that many carve-outs are conducted, not to improve efficiency, but to sell potentially overvalued equity. 2003 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Eric A. Powers, 2003. "Deciphering the Motives for Equity Carve-Outs," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(1), pages 31-50.
  • Handle: RePEc:bla:jfnres:v:26:y:2003:i:1:p:31-50
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    Cited by:

    1. Otsubo, Minoru, 2009. "Gains from equity carve-outs and subsequent events," Journal of Business Research, Elsevier, vol. 62(11), pages 1207-1213, November.
    2. Naga Lakshmi Damaraju & Jay B. Barney & Anil K. Makhija, 2015. "Real options in divestment alternatives," Strategic Management Journal, Wiley Blackwell, vol. 36(5), pages 728-744, May.
    3. Perotti, Enrico & Rossetto, Silvia, 2007. "Unlocking value: Equity carve outs as strategic real options," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 771-792, December.
    4. Otsubo, Minoru, 2013. "Value creation from financing in equity carve-outs: Evidence from Japan," Journal of Economics and Business, Elsevier, vol. 68(C), pages 52-69.
    5. Salim Chahine & Mohamad Zeidan, 2014. "Corporate governance and market performance of parent firms following equity carve-out announcements," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(2), pages 471-503, May.

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