Long-term returns from equity carveouts

Abstract

Using a sample of 628 carveouts during 1981-1995, this paper finds that the newly issued subsidiary stocks do not underperform appropriate benchmarks over a three-year period following the carveout. This result is in striking contrast with the documented poor performance of initial public offerings and seasoned equity offerings. I conjecture that the superior performance of subsidiary stocks arises because the subsidiary and parent firms can focus on fewer business segments after carveout, and because the parent firms continue to own a monitoring position in the subsidiary firms. I test whether the subsidiary stock performance is related to the number of business segments the parent firm has before carveout. The relationship is not always significant, which suggests another possible explanation, that the market may react efficiently to the likely future performance of carveouts.