The Positive Announcement‐Period Returns of Equity Carveouts: Asymmetric Information or Divestiture Gains?

Anand M. Vijh

131 citations0/0 files storedThe Journal of Business

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Reporting and Valuation Research

Abstract

Using a sample of 336 carveouts during 1980-1997, this paper shows that the announcementperiod returns increase with the ratio of subsidiary to non-subsidiary assets. This finding contradicts the asymmetric information model proposed by Nanda (1991). Additional tests relate the returns to the following divestiture-based explanations proposed by Schipper and Smith (1986) and others: refocusing of the parent and subsidiary operations, financing of new and existing projects, reducing the complexity of stock valuation, and enabling an eventual spinoff or third-party acquisition. The combined evidence rejects the asymmetric information hypothesis and supports the divestiture gains hypothesis of carveouts.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1995Diversification's effect on firm value 1986Equity issues and offering dilution 1986Valuation effects of security offerings and the issuance process 1995Corporate focus and stock returns 1986Seasoned equity offerings 1985Corporate capital expenditure decisions and the market value of the firm 1999Information asymmetry, valuation, and the corporate spin-off decision

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2014Signalling Theory and Equilibrium in Strategic Management Research: An Assessment and a Research Agenda 2011The Choice Between Joint Ventures and Acquisitions: Insights from Signaling Theory 2008Going Public to Acquire? The Acquisition Motive in IPOs 2008Research on corporate divestitures: A synthesis 2012The divestiture of acquired subunits: A resource dependence approach 2009How Much of the Diversification Discount Can be Explained by Poor Corporate Governance?

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