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The purpose of this paper is to examine two different choices of corporate divestiture for US firms: selling off assets to public firms or issuing stocks in equity…
The purpose of this paper is to examine two different choices of corporate divestiture for US firms: selling off assets to public firms or issuing stocks in equity carve-outs. The authors identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture.
The authors use the univariate tests, logistic regressions and buy-and-hold excess return computations to identify industry-related, firm-specific, deal-related and market-timing factors that influence the choice between the two methods of divestiture.
The results show that industry concentration, relative “hotness” of the equity carve-out market, market values of divested units and firm’s growth opportunities are all positively related to the probability of an equity carve-out selection. In contrast, firms in financial service industry, firms that divest smaller units and firms with higher asymmetric information mainly choose to divest assets through asset sell-offs. The findings also indicate that firms with higher leverage and/or higher cash flow constraint show a stronger likelihood for choosing either the equity carve-out option or asset sell-off with cash payment over asset sell-off with stock payment. In the long run, firms that sell-off their assets experienced better performance relative to firms that choose to carve-out.
The authors recognize several limitations of this study. First, the findings use the data collected in the US market. These findings may not be necessarily true to non-US firms. Therefore, one possible extension of this paper is to further examine the determinants that drive the methods of divestiture for non-US firms. Second, the authors have not examined the association between the choices of divestiture and the subsequent long-term operating performance of the firms. This could be another interesting direction for research in the future.
The findings have some implication for the divestiture literature by providing a set of determinants which play important roles on firms’ choice between an asset sell-off and an equity carve-out. The findings also have important implications for a potential acquirer who is interested in buying a firm’s subsidiary. Specifically, by analyzing the aforementioned influencing factors, the acquirer might foresee the possibility of a carve-out method and plan its bidding offer accordingly. From investors’ perspective, knowing which factors affect firms’ divesting methods and their subsequent long-run stock performance is undoubtedly beneficial to their investment strategies.
Prior research has attempted to address the reasons why firms divest or the outcomes of those actions. This paper focuses on the factors that influence the choice of sell-off versus carve-out once the decision to divest has been made. In addition, the authors look at a wide range of factors including industry-related, firm-specific, deal-related and market timing.
The paper's aim is to analyze excess returns generated by Canadian sell‐offs and their links to changes in firms' internal capital allocation efficiency to test the…
The paper's aim is to analyze excess returns generated by Canadian sell‐offs and their links to changes in firms' internal capital allocation efficiency to test the efficiency of internal capital markets after assets divestitures.
This study investigates the relationship between the level of the excess returns subsequent to sell‐offs and changes in the capital allocated through internal capital markets. The authors measure excess returns by calculating buy‐and‐hold abnormal (BHAR) returns up to three years after divestitures and test whether changes in value are related to changes in investment efficiency. The paper uses the relative value added by allocation (RVA) as developed by Rajan et al. to measure the variation in allocational efficiency of the internal capital market.
The study reveals that on average assets divestitures enable Canadian firms to keep up with the performance of their peers of the same industrial sector during the long‐run post divestiture period. A closer look at the results shows that the variation of long‐run post divestitures performance among Canadian firms is significantly and positively linked to changes in the allocational efficiency of the internal capital markets. These results suggest that dismantling some parts of the internal capital market does lead to improvements in firm value in the long run.
The sample is limited to a group of firms that sell off a portion of their assets. Further research could be conducted to determine whether other divestiture methods (spin‐off, sell‐off or equity carve‐out) have any impact on internal capital allocation efficiency and long run financial performance.
The paper adds to other studies examining the source of gains from divestitures by documenting the effects of changes in internal capital allocation efficiency on the creation of long‐term shareholder wealth.
Reasons behind the current bond sell-off.
Central Europe’s resilience to EM sell-off.
US/CHINA: Bond market vulnerable to a sell-off
CHINA: Policy move could contain further sell-off