Equity Carve-Outs And Changes In Corporate Control

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">This study proposes a corporate control hypothesis in which equity carve-outs facilitate changes in corporate control by providing an economical means to transfer control of corporate assets to bidders who will potentially create greater value.<span style="mso-spacerun: yes;">  </span>Consistent with this hypothesis, a statistically significant 16% of the equity carve-outs in this study's sample are taken over within six years.<span style="mso-spacerun: yes;">  </span>Those equity carve-outs subsequently taken over appear to be economically different from those motivated by other reasons.<span style="mso-spacerun: yes;">  </span>Parent firms of equity carve-outs subsequently taken over display a significantly greater share price reaction to the announcement of an equity carve-out than do parent firms of equity carve-outs not subsequently taken over.<span style="mso-spacerun: yes;">  </span>For those carve-outs subsequently taken over, an important factor contributing to parent firm gains is the relative size of the carve-out IPO.<span style="mso-spacerun: yes;">  </span>There appears to be an optimal retention level of 10-50% for carve-outs motivated by the intent to facilitate a change in corporate control.<span style="mso-spacerun: yes;">   </span></span></span><strong style="mso-bidi-font-weight: normal;"></strong></span></p>