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Management Buyouts of Divisions and Shareholder Wealth

Authors

  • GAILEN L. HITE,

  • MICHAEL R. VETSUYPENS

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    • Graduate School of Business, Columbia University and Edwin L. Cox School of Business, Southern Methodist University, respectively. The authors are grateful to Yakov Amihud, Bernard Black, Linda DeAngelo, Michael Jensen, Ron Masulis, David Mayers, Marcia Millon, Chris Muscarella, Clifford Smith, Nik Varaiya, Jerold Warner, Karen Wruck, Jerold Zimmerman, and, especially, Harry DeAngelo for helpful comments on earlier versions of this paper. This paper is an adaptation and extension of the second author's Ph.D. dissertation at the Simon Graduate School of Business Administration, University of Rochester. Financial support was provided by the Graduate School of Business at Columbia University and the Center for the Study of Financial Institutions and Markets at Southern Methodist University. The research assistance of David Arment, David Aston, and Peter Shaw is gratefully acknowledged. An earlier version of this paper was presented at the 1988 Western Finance Association meetings.


ABSTRACT

This paper examines the wealth effects to parent company shareholders around the announcement of divisional management buyouts. Despite the relative absence of “arm's-length” bargaining between buyer and seller, there is no evidence that divisional management buyouts result in reductions in parent company share prices. Instead, small but statistically significant wealth gains are found during the two-day period surrounding the buyout announcement. This evidence suggests that divisional buyouts reallocate ownership of corporate assets to higher valued uses and that parent company stockholders share in the expected benefits of this change in ownership structure.

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