Equity Carve-outs Research Articles

Market Reaction to Enterprise's Equity Carve-out Listing on the STAR Market - A Case Study of Tianneng Power

Market Reaction to Enterprise's Equity Carve-out Listing on the STAR Market - A Case Study of Tianneng Power

Motivation and Performance of the Spin-off Listing of Shengyi Technology

China Securities Regulatory Commission issued Several Provisions on the Pilot Project of domestic listing of the spin-off subsidiaries of listed companies in December, 2019, which was an important milestone for capital market in China. Before this provision was released, domestic listed companies who planned to conduct equity carve-out had to go list on Foreign Exchange. Since Shengyi Technology was the first listed parent company conducting equity carve-out after the announcement, citing the spin-off listing of Shengyi Technology as an example may enrich the research on the equity carve-out in China and provide suggestions for companies with similar plans. This paper adopts case study method, briefly summarizing the results of the current liteture and then analyzing the motivation and financial performance of Shengyi Technology. Then, this study draws a conclusion, finding policy support, coping with copetition, raising money and focusing on core business were the key motivations, and that equity carve-out had a positive impact on the performance of Shengyi Technology in the short term.

Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms

We examine whether equity carve-outs (ECOs) lead to improvements in the functioning of the internal capital markets (ICM) of diversified firms. Divestitures, including spin-offs, sell-offs, and equity carve-outs, can be employed by firms to improve allocative efficiency. Equity carve-outs, unlike other forms of divestiture, leave the parent's ICM largely intact but provide the opportunity to enhance internal and external corporate governance mechanisms that can improve the parent's ICM. Using a US sample of 354 equity carve-outs completed between 1980 and 2013, we find that the allocative efficiency of parents is augmented significantly following transaction completion. This increase in allocative efficiency is driven by improvements in both the external and internal governance characteristics of parent companies, consistent with the expectation that motivates equity carve-outs.

Like father, like son: Who creates listed subsidiaries?

Equity carve-outs and spin-offs generate listed subsidiaries that embrace conflicts of interests between controlling and minority shareholders. We find robust evidence that long-tenure managers tend to conduct these asset divestitures, especially when the divesting firm has a concentrated ownership structure. The result suggests that managers with the opportunity to extract private benefits establish entities that provide such opportunities. Meanwhile, large shareholders prevent managers from conducting these divestitures when they have sufficiently large cash flow rights. We find no evidence that firms launching listed subsidiaries achieve better financial outcomes than asset sell-off firms. Problematic entities in corporate governance further create such entities.

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

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.

An examination of the liquidity of equity carve-out parents

Although there have been other equity carve-out (ECO) studies, this is the first study to examine the liquidity of ECO parents. We investigate the traded parents of 234 equity carve-outs (ECO) during the period from 1993 to 2018. We examine several variables and their impact on three liquidity measures: bid-ask spread, turnover, and volatility. We confirm the Vijh (1994) liquidity measures: bid-ask spread, turnover, and volatility liquidity measures over seven periods: carve-out announcement, carve-out ex-date, five-day post carve-out period, lock-up date, second event announcement, second event ex-date, and the five-day post second event period. Also, we observe that consistent with Bali, Peng, Shen, and Tang (2014), liquidity can vary over time; liquidity measures peak at the lock-up date and the second event announcement date. In addition, we extend Cao, Field, and Hanka (2004), who excluded equity carve-outs and we observe that carve-out parent liquidity increases at the lock-up period. Moreover, we observe that the type of subsidiary second event can influence carve-out parent liquidity. The implications are that investors can economically benefit from ECO liquidity.

An Examination of the Corporate Parent and Divested Unit Governance Mechanisms

The current paper explores the governance mechanisms that are implemented by corporate parents and their divested units after a divestiture event. This study compares the inter-dependencies of stand-alone divested units and their parent companies by leveraging differences in two focal governance modes for stand-alone divested units, i.e., spin-offs and carve-outs, and the specific mechanisms that govern the relationship between the parent company and the divested unit post-divestiture. In this way, this paper recognizes that governance choices span beyond the choice of a discrete governance mode. The current study contrasts the use of divestiture governance mechanisms with the choice of the focal divestiture governance mode, spin-offs or carve-outs. Using a sample of US corporate spin-offs and equity carve-outs, and their innovation outcomes pre- and post-divestiture, this study finds that non-consistent divestitures, e.g., high(low) autonomous divestiture governance mode and low(high) autonomous divestiture governance mechanisms, may not realize the full innovation benefits of either integration or hierarchy.

Corporate Divestiture Decisions and Long-Run Performance

We examine the post-divestiture long-run performance of two different choices of corporate divestiture, asset sell-offs versus equity carve-outs, and find that the choice of divestiture methods has important implications for the post-divestiture long-run performance. Our findings show that the post-divestiture long-run abnormal returns of sell-off parents are significantly higher than those of the carve-out parents. Furthermore, we find a positive relationship between the post-divestiture long-run returns and the diversification discount. The effect of the diversification discount is weaker for divesting parents with higher levels of R&D. Our results also provide evidence that a firm’s pre-divestiture number of segments, its unrelatedness to the divested unit, and its level of asymmetric information are positively related to the probability of choosing the asset sell-off method.

Learning the wealth effects from equity carve-outs

We investigate how the market can provide early signals about the eventual effects of an equity carve-out on the wealth of parent firm shareholders. Using a sample of equity carve-outs from 1985–2015, we show that most wealth information regarding the IPO valuation of a subsidiary is observable in the share returns of the parent firm during the book-building period. Our study therefore adds timing and process understanding to existing studies showing a wealth impact of equity carve-outs on parent company shareholders.

Allocative Efficiency of Internal Capital Markets: Evidence from Equity Carve-outs by Diversified Firms

We examine whether equity carve-outs (ECOs) lead to improvements in the functioning of the internal capital markets (ICM) of diversified firms. Divestments, including spin-offs, sell-offs and ECOs, can be employed by firms to improve allocative efficiency. Equity carve-outs, unlike spin-offs and sell-offs, leave the parent’s ICM intact but provide the opportunity to enhance internal and external corporate governance mechanisms. Using a US sample of 354 ECOs completed between 1980 and 2013, we find that the allocative efficiency of parents is augmented significantly following ECOs. This increase in allocative efficiency is driven by improvements in the governance characteristics of parent companies.

The Effect of Shareholder-Level Taxes on Organizational Form and Stock Ownership: Evidence from Equity Carve-Outs of Master Limited Partnerships

ABSTRACT I examine the role of heterogeneous shareholder-level taxes in organizational form decisions and in subsequent changes in investor stock ownership. Specifically, I investigate the decision to form a master limited partnership (MLP), which is a tax-advantaged entity for tax-sensitive shareholders, but a tax-disadvantaged entity for tax-exempt shareholders. Consistent with shareholder-level taxes influencing organizational form decisions, I find that firms owned by more tax-exempt shareholders are less likely to carve-out MLPs. Consistent with shareholder-level taxes influencing stock ownership, I find that tax-sensitive investors, on average, decrease their ownership in the parent and hold a relatively larger ownership share in the MLP than in the parent after the carve-out. In contrast, tax-exempt investors own less of the MLP than of the parent. These results provide evidence that firms cater to investors' shareholder-level taxes in making organizational form decisions and that investors sort on tax characteristics inherent to organizational form. JEL Classifications: G32; H24; H25. Data Availability: Data used in this study are available from public sources identified in the paper.

The performance of European equity carve-outs

In this paper we examine the valuation effects of equity carve-outs in Europe. We demonstrate that equity carve-out announcements yield significant abnormal returns for the shareholders of parent firms. This positive market reaction is stronger in countries that better protect minority shareholder rights. However, a remarkable price reversal is detected in the aftermath of a carve-out transaction that lasts up to two years. In contrast, parent-firm operating performance improves as long as the disposal of subsidiary assets is proven to be an optimal corporate decision. Subsidiaries stemming from the restructuring transaction also experience an initial positive market reaction which then reverses to severe price losses within a few months of the first day of listing.

Die langfristige Wertentwicklung von Equity Carve-outs – Aktuelle empirische Evidenz für Westeuropa

Equity carve-outs (ECOs) have increasingly gained importance in Europe. Our study examines 52 equity carve-outs between 2005 to 2013 and evaluates their long-term performance compared to the market and comparable firms over an investment period of three years. Calculating buy-and-hold abnormal returns (BHAR) and applying the calendar-time portfolio method (CTIME), we measure a significant outperformance for the ECO sample after 12 months. Comparisons with initial public offerings, using a matched portfolio, show a significant abnormal return of 17% after 12 months. The hypothesis that ECOs show an average positive performance in the long-term finds support in our study. The superior performance of ECOs compared to IPOs remains also for longer time periods.

Determinants of divestiture methods for US firms: asset sell-off versus equity carve-out

Purpose The purpose of this paper is to examine two different choices of corporate divestiture for US firms: selling off assets to public firms or issuing stocks in equity carve-outs. The authors identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture. Design/methodology/approach The authors use the univariate tests, logistic regressions and buy-and-hold excess return computations to identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture. Findings The results show that industry concentration, relative “hotness” of the equity carve-out market, market values of divested units and firm’s growth opportunities are all positively related to the probability of an equity carve-out selection. In contrast, firms in financial service industry, firms that divest smaller units and firms with higher asymmetric information mainly choose to divest assets through asset sell-offs. The findings also indicate that firms with higher leverage and/or higher cash flow constraint show a stronger likelihood for choosing either the equity carve-out option or asset sell-off with cash payment over asset sell-off with stock payment. In the long run, firms that sell-off their assets experienced better performance relative to firms that choose to carve-out. Research limitations/implications The authors recognize several limitations of this study. First, the findings use the data collected in the US market. These findings may not be necessarily true to non-US firms. Therefore, one possible extension of this paper is to further examine the determinants that drive the methods of divestiture for non-US firms. Second, the authors have not examined the association between the choices of divestiture and the subsequent long-term operating performance of the firms. This could be another interesting direction for research in the future. Practical implications The findings have some implication for the divestiture literature by providing a set of determinants which play important roles on firms’ choice between an asset sell-off and an equity carve-out. The findings also have important implications for a potential acquirer who is interested in buying a firm’s subsidiary. Specifically, by analyzing the aforementioned influencing factors, the acquirer might foresee the possibility of a carve-out method and plan its bidding offer accordingly. From investors’ perspective, knowing which factors affect firms’ divesting methods and their subsequent long-run stock performance is undoubtedly beneficial to their investment strategies. Originality/value Prior research has attempted to address the reasons why firms divest or the outcomes of those actions. This paper focuses on the factors that influence the choice of sell-off versus carve-out once the decision to divest has been made. In addition, the authors look at a wide range of factors including industry-related, firm-specific, deal-related and market timing.

Equity carve-outs, divergence of beliefs and analysts’ following

In this paper we estimate the impact of a carve-out on the standard deviation of earning per share (EPS)forecast (divergence of belief) and the number of analysts following the firm, using international data. We were expecting that the standard deviation of EPS forecast will decrease after the carve out as more information will be available to the analysts, once a subsidiary will be partially sold in to the market. But results revealed that the standard deviation of EPS forecast increases rather than decreases. For the number of analysts following the parent, we hypothesized that fewer analysts will be following the parent after the carve-out as some analysts specialized in the subsidiary business may leave the parent and start following the subsidiary. However, the results show that the number of analysts following the parent increases on average after the carve-out and the difference between the number of analysts before and after the event is significant.

The Long-Run Performance Comparison of Equity Carve-outs and Initial Public Offerings in Korea

The Long-Run Performance Comparison of Equity Carve-outs and Initial Public Offerings in Korea

The Equity Carve-Outs Pricing and Price Discovery upon the Private Information in Korean Market

The Equity Carve-Outs Pricing and Price Discovery upon the Private Information in Korean Market

Equity Carve-Outs: A Sign of Low Opportunity Industry?

Equity carve-outs have been studied since long, but the main focus of previous studies has been the firm level impact of carve-outs. We take this discussion to the industry level and argue that equity carve-outs, on average, are carried out in industries, where opportunities are low. These industries have low operating performance, gauged on profitability, cash flow and profit margin compared to industries where there are no carve-outs. In addition to this evidence, we found that the merger and acquisitions activities, in which the target is in industries where carve-out activity happened in last three years, bidders have less value created compared to mergers where the target industry has no carve-out activity. Both, the low operating performance of industries three years post carve-outs and low value created by bidders having targets in industries where carve-outs happen, signal that industries where carve-outs take place have low opportunities ahead.

Ex-post stock return behaviour of corporate restructurings and corporate control

Purpose This paper aims to investigate the correlation between stock returns of the parent and newly created entity and the degree of return skewness in parents in the three different corporate restructurings. Design/methodology/approach Using a sample of spin-offs, equity carve-outs and tracking stocks, ordinary least squares regression is used to test the relationship between stock return correlation as well as stock return skewness and the type of corporate restructurings. Findings Tracking stock offering has the largest correlation in stock returns, whereas spin-off has the least correlation in stock returns. Also, the result from the skewness test is not consistent with the hypothesis that the stock returns skewness is positively related to the degree of ownership and control. Originality/value This is one of the few papers looking at the three corporate restructurings and their return skewness.

Are Incentive Stock Options Signaling Better Corporate Governance? - An Evidence from Equity Carve-Outs

I analyze the long-run performance and earnings management behavior of equity carve-outs conditioned on whether the executives received incentive stock options at the IPO date. Carve-outs that did not grant incentive stock options subsequently underperform both relative to the overall market and relative to a sample of carve-outs that granted stock options. I show that in absence of incentive stock options, companies adopt more income-increasing Accounting techniques around the IPO. Accruals in years around the IPO explain the cross-sectional variation of the long-run stock market and accounting underperformance. Contrarily, carveouts that grant incentive stock options to their executives at the IPO date do not underperform appropriate benchmarks over three-year period following the IPO and use less aggressive accounting around the IPO. My results point that incentive stock options are signaling better corporate governance to the market that result in better long-run stock market and accounting performance.