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The long-term performance of parent and units following equity carve-outs

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  • Jeff Madura
  • Terry Nixon

Abstract

Recent research has shown that ownership restructuring decisions by firms can enhance value. In particular, Allen and McConnell (1998) find that carve-outs elicit a favourable share price response for parent firms at the time the carve-outs are reported. One explanation is that a carve-out facilitates parental focus and enables the market to value a new entity that now has its own identity, which uncovers hidden value. Since these valuation effects are measured when the carve-outs are reported, they reflect an ex ante view of potential change in performance attributed to the restructuring of ownership. An attempt is made to determine the long-term performance of firms following carve-outs. At the time of the carve-out, parents have information about the unit unknown to the public. The performance of parents and the carved-out units are separately assessed to determine whether there is a wealth transfer between the two entities as the asymmetric information that exists at the time of the carve-out dissipates over time. In general, the long-term effects of the parent and the unit following carve-outs are unfavourable. This result is surprising in light of theory behind the potential benefits of carve-outs, and the favourable short-term valuation effects, but not inconsistent with Ritter's (1991) findings regarding the long-run performance of initial public offerings (IPOs). A closer look reveals that the long-term performance is more unfavourable for parents that were distressed before the carve-outs, and more unfavourable for units that were carved out of distressed parents. This suggests that distressed parents may not necessarily resolve their distress with carve-outs, and that the carved-out units of these parents may contain a portion of the distress symptoms.

Suggested Citation

  • Jeff Madura & Terry Nixon, 2002. "The long-term performance of parent and units following equity carve-outs," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 171-181.
  • Handle: RePEc:taf:apfiec:v:12:y:2002:i:3:p:171-181
    DOI: 10.1080/09603100110090091
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    Citations

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    Cited by:

    1. Wei He & Tarun Mukherjee & Peihwang Wei, 2009. "Agency problems in tracking stock and minority carve-out decisions: Explaining the discrepancy in short- and long-term performances," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(1), pages 27-42, January.
    2. repec:eee:finsta:v:34:y:2018:i:c:p:121-135 is not listed on IDEAS
    3. Bryan Mase, 2006. "Investor awareness and the long-term impact of FTSE 100 index redefinitions," Applied Financial Economics, Taylor & Francis Journals, vol. 16(15), pages 1113-1118.
    4. Thomas H. Thompson, 2016. "Underpricing, partial price adjustments, and equity carve-outs," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(2), pages 345-366, April.
    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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