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

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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