Universal Banks, Corporate Control, and Equity Carve-Outs in Germany

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If a firm sells a subsidiary to the public via an IPO this is called an equity carve-out. Carve-outs can be interpreted either as an instrument to raise funds, or as a way to restructure the firm. There are two issues that render them particularly interesting from a corporate control perspective. First, carve-outs are mainly conducted by large conglomerate firms, where agency problems due to the separation of ownership and control are likely to be severe. Second, a carve-out is an event where a firm’s management raises funds at the expense of control rights in the subsidiary. As argued by Allen/McConnel (1998), although the parent often still holds significant stakes in the subsidiary after the IPO, management of the parent has lost significant control rights: The newly listed subsidiary has its own board of directors, is subject to disclosure requirements, and is directly subject to the mechanisms of the market for corporate control. 1 Hence, carve-outs always lead to a change in the governance structure, and a market evaluation of this change can be observed. In this paper, we conjecture that abnormal returns of carve-out announcements depend on the pre-event control structure of the conglomerate firm. The underlying idea is simple: the more the management of a conglomerate firm is subject to control by a governance institution (in particular controlling shareholders, supervisory boards, and banks), the