A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs

• (a) Carve-out (IPO of subsidiary): sell part of subsidiary shares owned by parent to the public

• (b) Spin-off (stock dividend): distribute all the subsidiary shares owned by parent to existing parent shareholders on a pro rata basis

• (c) Sell-off: privately sell part of parent owned assets to third party

Raising funds for parent

Issue publicly traded new

security

Controlling interest at

parent

Carve-out yes yes Reduced but still

majority

Spin-off no yes zero

Sell-off yes no zero

Comparison among three types of voluntary corporate restructurings

AR of announcing firms

AR of rivals

Information conveyed is industry wide or firm specific or generates competitive effect on rivals

+ + Industry wide

_ _ Industry wide

+ 0 Firm specific

_ 0 Firm specific

+ _ Competitive

_ + Competitive

Type of information conveyed in the announcement

Parent Rivals of parent

Subsidiary Rivals of subsidiary

Carve-out + 0 unobservable _

Spin-off + 0 unobservable +

Sell-off + 0 unobservable 0

Event study results of this paper and prior studies

A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs

• Parents stocks react positively to all three voluntary corporate restructuring decisions. Why?

1. Tying management compensation to market value of subsidiary (a,b)2. Improvement in public understanding of subsidiary value (a,b)3. Better asset management (a,b,c)4. When parent managers believe the outside investors undervalue the

parent and are likely to overvalue the subsidiary, parent will choose carve-out rather than seasoned equity offering to raise funds (a)

• When parent managers believe the subsidiary is likely to be undervalued and are unwilling to issue equity in the subsidiary, parent will choose spin-off

• When will parent managers choose sell-off? Only if managers do not retain the proceeds (to reduce the free cash flow problems)

Carve-out Efficiency hypothesis

Efficiency hypothesis

Securities issuance

hypothesis

Securities issuance

hypothesis

Rivals of parent

Rivals of subsidiary

Rivals of parent

Rivals of subsidiary

Industry wide

+ + + _

Competitive _ _ _ +

Firm specific

0 0 0 0

Predicted intra-industry event study results

Spin-off Efficiency hypothesis

Efficiency hypothesis

Securities issuance

hypothesis

Securities issuance

hypothesis

Rivals of parent

Rivals of subsidiary

Rivals of parent

Rivals of subsidiary

Industry wide

+ + * +

Competitive _ _ * _

Firm specific

0 0 0 0

Predicted intra-industry event study results

Sell-off Efficiency hypothesis

Efficiency hypothesis

Securities issuance

hypothesis

Securities issuance

hypothesis

Rivals of parent

Rivals of subsidiary

Rivals of parent

Rivals of subsidiary

Industry wide

+ + * *

Competitive _ _ * *

Firm specific

0 0 0 0

Predicted intra-industry event study results

A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs

• The evidence does not support the efficiency hypothesis that predicts similar subsidiary rival reactions to three different restructuring mechanisms. Rather it is more consistent with securities issuance hypothesis.

• Similar to the negative subsidiary rival reactions to carve-out, conventional IPO rivals also react negatively. On the contrary, going private transactions generate positive reactions to rivals. These results can be explained by securities issuance hypothesis.

• Subsidiary rivals react to spin-off positively.• Subsidiary rivals do not react to sell-off, whether or not the proceeds

are retained. This is consistent with the evidence that private financing (bank loans or private placements) is more value enhancing than public securities issuance, but inconsistent with free cash flow argument.