An Investigation of the Gains from Specialized Equity Claims

Audra L. Boone, David Haushalter, Wayne H. Mikkelson
2003 Social Science Research Network  
We investigate whether operating performance improves when a firm creates traded equity claims on a subsidiary without relinquishing control. We find that the change in a parent firm's operating performance following an equity carve-out is negatively related to the fraction of subsidiary shares that the parent firm retains after a carve-out. Operating performance of parent firms improves only when the parent completely divests its ownership of the subsidiary. We also find no improvement in
more » ... ting performance following the creation of tracking stock. We conclude that corporate restructuring without relinquishing control of assets does not enhance operating performance. In recent years, equity carve-outs, spin-offs, asset sales, and tracking stocks have been important methods of restructuring assets and financial claims of publicly traded companies. These forms of corporate restructuring vary in terms of whether they create new equity claims on assets and how they change control over assets. For example, equity carve-outs and spinoffs create new and distinct equity claims on some portion of a firm's assets; the sale of assets does not. An asset sale or spin-off results in a complete divestiture of assets by the parent, but the creation of tracking stock has virtually no effect on the assets controlled by the parent. Following a carve-out, the parent's control ranges from majority ownership to no ownership of the subsidiary. Although prior research documents that the stock market initially views all of these forms of restructuring as value enhancing, the source of an increase in value is not entirely clear. 1 We provide evidence on whether the gains from restructuring depend on the parent relinquishing its control over assets. Our primary objective in this article is to answer whether parent companies benefit when they restructure assets to create distinct equity claims, yet retain substantial control of a subsidiary. We investigate this issue by examining changes in operating performance following an equity carve-out. The distinctive feature of equity carve-outs that motivates our study is that, although
doi:10.2139/ssrn.395882 fatcat:cltzbou7n5hf5ho4ibhaktqcga