When are the Wealth Effects of a Carve-Out IPO Known by the Market?

Abstract

Using a sample of equity carve-outs offered over the period of 1985-2015, we find out the time at which the market can know the effects of an equity carve-out on the wealth of existing shareholders. In equity carve-outs, the parent holds a significant fraction of the carved-out subsidiary. Contrary to conventional IPOs, investors can trade in parent’s stock in the non-rationed market during the book-building period of the carve-out. This unique characteristic let the market pre-empt the initial return to the subsidiary shares. We find that the major information regarding the initial returns of the subsidiary is observable in the share returns of the parent firm during the book-building period of the carve-out IPO. Our analysis reveals that this is the time (book-building period) when the market can know the wealth effect of the carve-out on the existing shareholders.