Essays in corporate restructuring
Abstract
The thesis examines topics in the restructuring of corporations through equity carve-outs and corporate spin-offs. This study extends Schipper and Smith (1986) by analyzing the cross-sectional variation in stock returns surrounding announcements of equity carve-outs. I find that returns to shareholders are positively related to financial leverage, the size of subsidiary units, and the use of proceeds to repay debt. I also find that recent returns to equity are inversely related to announcement-period returns when firms repay debt, while prior performance is positively related to stock returns when firms do not pay out funds. Highly leveraged and poorly performing firms are also more likely to use proceeds of equity carve-outs to repay debt. The evidence supports Jensen's (1989) argument that financial leverage acts to preserve firm value by inducing a restructuring of claims in response to poor performance. The transfer of proceeds out of poorly performing firms also reduces agency costs that arise with free cash flow. I find no evidence to support Nanda's (1991) argument that equity carve-outs fund investment projects and signal that parent firms are undervalued. In spin-offs, I examine the unbundling of claims and effects of information transfer between insiders and outsiders in a rational expectations model. The analysis predicts that insiders in spun-off firms possess information advantages vis-a-vis outsiders following the unbundling of claims. Insiders may profit from trading in cases where they hold private information at the component level or observe a differential precision in firm component payoffs. The evidence indicates that insiders in spun-off firms earn substantial abnormal returns from trading following spin-offs. Insiders in parent firms, however, do not earn significant returns in post-spin-off trading. I also find that the public disclosure of insider trades in spun-off firms is valuable to outsiders. The net dollar volume of insider buying in spun-off firms in the period following spin-offs is positively related to above-average after-market performance and the probability these firms become takeover targets. Net selling by insiders in spun-off firms is an indicator of poor after-market performance and of exchange delistings due to bankruptcy or insolvency problems.
Degree
Ph.D.
Advisors
McConnell, Purdue University.
Subject Area
Finance|Management
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