Three essays on equity carve-out

Date of Completion

January 2003


Economics, Finance




In essay 1, we propose an alignment hypothesis that corporate governance influence firms' equity carve-out decisions. Our sample includes 103 firms that carve out their subsidiaries during the period of 1993 to 2001. First, we examine the impact of CEO ownership structure, compensation structure, and board structure on the equity carve-out decisions. We find that firms whose CEOs own more of the firms' shares and have less outside directors are more likely to carve out their subsidiaries. ^ We further investigate the effect of stock ownership, compensation structure, and board composition on the amount of the subsidiaries that firms choose to offer in the initial public offerings. Our results suggest that firms with higher CEO stock ownership and less outside directors tend to carve out a higher portion of their subsidiaries. ^ Essay 2 examines the relationship between the executive ownership and the shareholder wealth during the carve-out announcement. We find a positive relationship between the three-day cumulative abnormal returns and the CEO stock ownership. Also, our data suggests that firms with higher CEO stock ownership have higher first day returns associated with their subsidiaries' initial public offerings. ^ Collectively, we find that CEO stock ownership helps to minimize the conflict of interest between shareholders and managers, hence increase the shareholder wealth during the equity carve-out decisions. ^ Essay 3 focus on how the firms and their underwriters incorporate the public information into the price of the new offerings. We find that returns of the parent firms during pre-filing period and pre-pricing period are positively and significantly related to price update of the offering. They also positively correlated to the IPO underpricing. These results imply that the issuing firms and their underwriters do not fully incorporate market valuation information regarding new issuing firms into setting the initial price range and or the final offer price. ^ In addition, we explore IPO pricing inefficiency over time. We find that pre-97 curve out IPOs are efficiently priced in that available public information is fully incorporated in the offer price. For post-97 carve-out IPOs, however, returns of the parent firms prior to the date that the initial price range is set can be used to predict the price update during the registration period as well as IPO underpricing. ^