Slovin is from Louisiana State University, and Sushka is from Arizona State University. We acknowledge the valuable comments and suggestions of the anonymous referee and the editor, René Stulz. We thank Wan L. Lai for research assistance. This research was partially supported by a grant from the summer research program at Arizona State University, College of Business.
The Implications of Equity Issuance Decisions within a Parent-Subsidiary Governance Structure
Article first published online: 18 APR 2012
1997 The American Finance Association
The Journal of Finance
Volume 52, Issue 2, pages 841–857, June 1997
How to Cite
SLOVIN, M. B. and SUSHKA, M. E. (1997), The Implications of Equity Issuance Decisions within a Parent-Subsidiary Governance Structure. The Journal of Finance, 52: 841–857. doi: 10.1111/j.1540-6261.1997.tb04824.x
- Issue published online: 18 APR 2012
- Article first published online: 18 APR 2012
We provide evidence about the motivation for a parent–subsidiary governance structure by analyzing valuation effects of seasoned equity offerings by publicly traded affiliated units. Our results support Nanda's (1991) theoretical model which predicts equity offerings convey differential information about subsidiary and parent value. Subsidiary equity issuance has negative valuation effects on issuing subsidiaries and positive effects on parents, while parent equity issuance reduces issuing parent wealth and increases subsidiary wealth. Our evidence suggests that a parent–subsidiary organizational structure enhances corporate financing flexibility and mitigates underinvestment problems identified by Myers and Majluf (1984). There is no evidence of subsidiary wealth expropriation.