Equity Carve-Outs, Dual Directors, and Internal Labor Markets

Pengda Fan

doi:10.3390/ijfs10010016

Abstract

Given the prevalence of dual directors who serve simultaneously on the parent as well as the subsidiary board, it is important to examine their functions, a topic largely ignored in the existing literature. Exploring the functions of dual directors highlights equity carve-out objectives other than strategic refocusing. To examine our hypothesis, we first conducted an event study to examine stock market reaction to carve-out decisions. In addition, we compared subsidiaries’ performance after carve-outs between firms with dual directors and their matching firms based on the propensity score. We find evidence that the Japanese stock market reacts positively to the presence of dual directors who hold CEO positions in carve-out subsidiaries, especially when they are relatively young. Additionally, we find that carve-out subsidiaries led by young dual directors tend to outperform their matched counterparts in the long run. In contrast, when dual directors do not hold the CEO position, we find no evidence of the stock market reacting positively to them. The results of this study suggest that young CEOs appointed from the internal labor markets care more about long-term reputation, and can enhance shareholder wealth of both parent and subsidiary firms.

Highlights

This study investigates the role of dual directors—people who serve simultaneously on the board of the parent firm as well as the carve-out firm—in enhancing shareholder wealth
Our results suggest that dual directors create value for both the carve-out and parent companies, and that the CEO position provides younger employees in the internal labor markets with a strong incentive to work hard
While the subsidiaries with dual directors are smaller than their counterparts, we found no significant difference in the various firm characteristics: Leverage, ROA, CAPEXP, asset tangibility, OUTSIDEBOARD, Subsidiary proceeds, CEO Age, Pyramid structure dummy

Summary

Introduction

This study investigates the role of dual directors—people who serve simultaneously on the board of the parent firm as well as the carve-out firm—in enhancing shareholder wealth. Conventional wisdom is that poorly performing or financially constrained firms have an incentive to conduct asset divestitures (carve-outs or spin-offs) with the aim to refocus on their core businesses.. Conventional wisdom is that poorly performing or financially constrained firms have an incentive to conduct asset divestitures (carve-outs or spin-offs) with the aim to refocus on their core businesses.1 This fact suggests that parent companies, post carve-outs, will exit from the subsidiaries though secondary events (Klein et al.1991; Otsubo 2009).. There is a burgeoning literature that suggests that some firms tend to retain a majority of the ownership of their subsidiaries in the long term or re-acquire the subsidiaries during the post-carve-out period (Desai et al 2011; Otsubo 2013; Perotti and Rossetto 2007), which implies that firms may conduct carve-outs for different motivations. Exploring the functions of dual directors highlights equity carve-out objectives other than strategic refocusing

Objectives

Results

Conclusion