School of Business Administration, University of Southern California. The author would like to thank René Stulz (the editor), Jay Ritter, an anonymous referee, and seminar participants at USC for many useful comments and suggestions.
On the Good News in Equity Carve-Outs
Article first published online: 30 APR 2012
1991 The American Finance Association
The Journal of Finance
Volume 46, Issue 5, pages 1717–1737, December 1991
How to Cite
NANDA, V. (1991), On the Good News in Equity Carve-Outs. The Journal of Finance, 46: 1717–1737. doi: 10.1111/j.1540-6261.1991.tb04641.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
The announcement of the sale of equity in a wholly owned subsidiary of a corporation is received by the market as good news about the value of the existing equity in the parent corporation. This is in stark contrast to announcements of other forms of public equity financing. We show that the apparent inconsistency between the market response to equity carve-out announcements and other forms of equity financing can be easily understood in the Myers and Majluf (1984) framework. It is shown that firms that resort to an equity carve-out will be firms that, on average, are being undervalued by the market.