Parent Firm Characteristics and the Abnormal Return of Equity Carve-outs

This study investigates the impact that ex-ante parent firm characteristics have on abnormal returns around the announcement and on initial returns of carved out subsidiaries for a sample of 104 carve-outs and their parent during the period 1990-2009. I examine the performance, leverage and corporate governance effect on abnormal returns during 3-day event window and on initial day returns of subsidiaries. The results show that parents with poor performance are likely to have higher abnormal returns during the event window, and the carved out subsidiaries are likely to obtain higher returns on the first trading day. However, the performance effect is insignificant. In addition, highly leveraged parent firms tend to have higher abnormal returns and the subsidiaries are likely to have higher initial day returns. Furthermore, this study suggests a negative relationship between the pre-event ownership concentration and initial day returns, but the governance effect on abnormal returns is not clear. Keyword: Equity carve-out, IPO underpricing, performance, leverage, corporate governance

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