Does a Parent–Subsidiary Structure Enhance Financing Flexibility?
Article first published online: 16 MAY 2006
The Journal of Finance
Volume 61, Issue 3, pages 1337–1360, June 2006
How to Cite
VIJH, A. M. (2006), Does a Parent–Subsidiary Structure Enhance Financing Flexibility?. The Journal of Finance, 61: 1337–1360. doi: 10.1111/j.1540-6261.2006.00874.x
- Issue published online: 16 MAY 2006
- Article first published online: 16 MAY 2006
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 seasoned equity offering (SEO) announcements during 1981–2002, 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.