Investment opportunities, investment efficiencies, and equity carveouts
Abstract
This paper investigates the relation between investment opportunities, improvements in investment efficiency, and the abnormal returns associated with the announcement of equity carveouts. Using a sample of 343 equity carveouts that took place between 1979 and 2002 I find that firms that conduct equity carveouts have higher debt levels, lower interest coverage ratios, and higher investment opportunities than their industry peers. I find a positive connection between investment opportunities and the abnormal returns realized by firms that announce equity carveouts. However, I show that it is the investment opportunities of the carved-out subsidiary rather than those of the parent that positively correlate with the abnormal returns. To determine if the positive abnormal returns associated with the announcement of equity carveouts can be due to improvements in investment efficiency, I conduct tests which show that after the carveout, the subsidiary's sensitivity of investment to investment opportunities increases. I also use two measures of firm-level investment efficiency to show that parent investment efficiency increases after equity carveouts.
Degree
Ph.D.
Advisors
McConnell, Purdue University.
Subject Area
Finance
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