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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.

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, March.
    • Handle: RePEc:bla:jfnres:v:26:y:2003:i:1:p:31-50
    DOI: 10.1111/1475-6803.00043
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    Cited by:

    1. 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.
    2. Dasilas, Apostolos & Leventis, Stergios, 2018. "The performance of European equity carve-outs," Journal of Financial Stability, Elsevier, vol. 34(C), pages 121-135.
    3. Vitkova, Valeriya & Tian, Siyang & Sudarsanam, Sudi, 2023. "Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms," International Review of Financial Analysis, Elsevier, vol. 86(C).
    4. Forcadell, Francisco Javier & Sanchez-Riofrio, Angelica & Guerras-Martín, Luis Ángel & Romero-Jordán, Desiderio, 2020. "Is the restructuring-performance relationship moderated by the economic cycle and the institutional environment for corporate governance?," Journal of Business Research, Elsevier, vol. 110(C), pages 397-407.
    5. Klein, Christian & Schiereck, Dirk & Ton, Thai, 2018. "Die langfristige Wertentwicklung von Equity Carve-outs – Aktuelle empirische Evidenz für Westeuropa," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 72(3), pages 197-211.
    6. 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.
    7. 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.
    8. Lewis H. K. Tam, 2014. "The impacts of parent’s listing status on subsidiary’s financial constraint and cost of equity capital: the case of equity carve-outs," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 275-299, March.
    9. 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.
    10. Otsubo, Minoru, 2009. "Gains from equity carve-outs and subsequent events," Journal of Business Research, Elsevier, vol. 62(11), pages 1207-1213, November.

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