Equity carve-outs and signal credibility /
Previous research finds that equity carve-out announcements result in positive mean excess returns to the parent firm. While the announcement effects are well established, the rationale for the positive stock price response is not currently understood. This study sheds light on sources of the good...
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| Format: | Thesis Book |
| Language: | English |
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[Place of publication not identified] :
[publisher not identified] ;
1996.
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| Online Access: | http://proxy.library.tamu.edu/login?url=http://proquest.umi.com/pqdweb?did=739325541&sid=1&Fmt=2&clientId=2945&RQT=309&VName=PQD |
| Summary: | Previous research finds that equity carve-out announcements result in positive mean excess returns to the parent firm. While the announcement effects are well established, the rationale for the positive stock price response is not currently understood. This study sheds light on sources of the good news in equity carve-outs first proposed by Schipper and Smith (1986). I find that a change in top managers prior to the carve-out announcement is significant in explaining the good news. The evidence suggests that the market regards carve-outs following a change in top managers as part of a favorable business strategy. The market appears to view the capital raising efforts of new managers in a more favorable light than similar efforts by incumbent managers. This discrepancy is particularly pronounced when the parent firm retains control of the carved-out subsidiary and when the carve-out is not timed to coincide with a hot issuance market. In the absence of a management change, the market appears to treat carve-outs more like seasoned equity offerings, with the negative reaction associated with SEOs mitigated by some of the features unique to carve-outs. Absent a change in managers, the market reacts most favorably to carve-outs following poor operating and stock performance and when the carved-out subsidiary is a core business of which the parent firm maintains control. Excess returns are higher for firms without a change in managers when the firm pays out the proceeds to investors, possibly due to the agency cost of managerial discretion. The degree of information asymmetry between managers and investors affects the magnitude but not the direction of the share price response. In summary, the good news in equity carve-outs appears to be partially explained by a signal of organizational change, such as a change in top managers. Without a management change, other indications of organizational change must be present or the market reacts to the carve-out announcement as it might to a seasoned equity offering. |
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| Item Description: | Vita. "Major subject: Finance". |
| Physical Description: | ix, 62 leaves ; 28 cm. Issued also on microfiche from University Microfilms Inc. |
| Bibliography: | Includes bibliographical references: pages 55-59. |