Using a sample of 336 carveouts during 1980-1997, this paper shows that the announcementperiod returns increase with the ratio of subsidiary to non-subsidiary assets. This finding contradicts the asymmetric information model proposed by Nanda (1991). Additional tests relate the returns to the following divestiture-based explanations proposed by Schipper and Smith (1986) and others: refocusing of the parent and subsidiary operations, financing of new and existing projects, reducing the complexity of stock valuation, and enabling an eventual spinoff or third-party acquisition. The combined evidence rejects the asymmetric information hypothesis and supports the divestiture gains hypothesis of carveouts.

comments and suggestions. All remaining errors are my own. The Interaction of Ownership, Governance, and Product Markets:

We argue that many firms become publicly traded on a stock exchange as the first stage of a longer term divestment plan. Making a direct sale of unlisted stock may be associated with great adverse selection costs. The publicly listed stock price reduces adverse selection by aggregating the information of several investors, and this market valuation, rather than the cash infusion, could be the main benefit of an initial public offering. This theory provides a unified treatment of a whole range of empirical observations, in particular why initial owners frequently exit completely subsequent to an initial public offering (IPO) and why the number of stock market introductions increases with the stock price level. The model also reformulates the “sweet taste ” explanation of IPO underpricing in a way which is consistent with recent evidence. Finally, we argue that the number of firms which go public is inefficiently large.

This paper provides some empirical evidence on a relatively new and increasingly prevalent form of equity restructuring called tracking stock. We identify the effects associated with tracking stock announcements by excluding from our sample those announcement events that include other significant news announcements on the event date, such as announcements of acquisitions and earnings. For the 35 announcement events that fit this criteria, we find a mean abnormal return of over 3 percent in the two-day period surrounding the announced proposal to issue a tracking stock, with 30 of the 35 firms in the sample earning positive abnormal returns.

I examine whether firms exploit a publicly traded parent-subsidiary structure to issue equity of the overvalued firm regardless of which firm needs funds, and whether this conveys opposite information about firm values. Using 90 subsidiary and 37 parent SEO announcements during 1981 to 2002, I document negative returns to issuers but insignificant returns to nonissuers in both samples, and insignificant changes in combined firm value and parent’s nonsubsidiary equity value in subsidiary SEOs. Firms issue equity to meet their own financing needs. My evidence contrasts with previous studies and suggests that parent-subsidiary structures do not enhance financing flexibility. ∗ Tippie College of Business, The University of Iowa. I wish to thank Matt Billett, Jie Cai, and Jon Garfinkel for useful comments. I am very obliged to two anonymous referees, an associate editor, and Robert Stambaugh (the editor) for many comments that substantially improved this paper. Wei Li provided assistance with data collection. Does a Parent-Subsidiary Structure Enhance Financing Flexibility? Corporate acquisitions and divestitures have been a constant feature of the U.S. financial markets. The

Equity carve-outs, the listing of a stake in a subsidiary on the stock market, are empirically transitory arrangements. This paper studies decisions aimed to gaining access to the choice over a ”second stage ” event, namely either a sell-off or a buy-back decision. Hence, an equity carve out can be seen as a compound option. The decision is driven by learning over strategic synergies between the parent firm and the subsidiary, which evolves stochastically over time. We find that the decisions to carve-out, to buy-back and to sell off are critically influenced by uncertainty over future synergies. We also find that there is an optimal amount of shares sold, which is positively related to uncertainty over future synergies. 2 1

Many parents that carve out units eventually restake. While previous literature reports a positive market reaction to parents conducting carve-outs, we find that the response to carve-outs is negative or insignificant for parents who ultimately restake in the carved-out unit. The stock-price performance for both the parent and unit is poor in the period following the carve-out, and units that are subsequently restaked perform considerably worse than their counterpart units that are not restaked. The announcement of the restaking is met with a favorable market reaction for both the parent and the unit. The announcement effects are less favorable when the parent’s recent ROA is strong and when the unit has relatively high debt to total assets and price to book ratios. Unit announcement effects are more favorable when it is completely restaked and when the parent is in a related line of business, and less favorable when unit ROA and cash to total asset ratios are high. Moreover, the parent firm’s performance following complete restaking is strong, which suggests that parents who fully restake the unit are able to best enhance value.