A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs (a) Carve-out (IPO of subsidiary): sell part of subsidiary shares owned by parent to the public (b) Spin-off (stock dividend): distribute all the subsidiary shares owned by parent to existing parent shareholders on a pro rata basis (c) Sell-off: privately sell part of parent owned assets to third party

Raising funds for parent Issue publicly traded new security Controlling interest at parent Carve-outyes Reduced but still majority Spin-offnoyeszero Sell-offyesnozero Comparison among three types of voluntary corporate restructurings

AR of announcing firms AR of rivals Information conveyed is industry wide or firm specific or generates competitive effect on rivals ++Industry wide __ +0Firm specific _0 +_Competitive _+ Type of information conveyed in the announcement

ParentRivals of parent SubsidiaryRivals of subsidiary Carve-out+0unobservable_ Spin-off+0unobservable+ Sell-off+0unobservable0 Event study results of this paper and prior studies

A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs Parents stocks react positively to all three voluntary corporate restructuring decisions. Why? 1.Tying management compensation to market value of subsidiary (a,b) 2.Improvement in public understanding of subsidiary value (a,b) 3.Better asset management (a,b,c) 4.When parent managers believe the outside investors undervalue the parent and are likely to overvalue the subsidiary, parent will choose carve-out rather than seasoned equity offering to raise funds (a) When parent managers believe the subsidiary is likely to be undervalued and are unwilling to issue equity in the subsidiary, parent will choose spin-off When will parent managers choose sell-off? Only if managers do not retain the proceeds (to reduce the free cash flow problems)

Carve-outEfficiency hypothesis Securities issuance hypothesis Rivals of parent Rivals of subsidiary Rivals of parent Rivals of subsidiary Industry wide +++_ Competitive___+ Firm specific 0000 Predicted intra-industry event study results

Spin-offEfficiency hypothesis Securities issuance hypothesis Rivals of parent Rivals of subsidiary Rivals of parent Rivals of subsidiary Industry wide ++*+ Competitive__*_ Firm specific 0000 Predicted intra-industry event study results

Sell-offEfficiency hypothesis Securities issuance hypothesis Rivals of parent Rivals of subsidiary Rivals of parent Rivals of subsidiary Industry wide ++** Competitive__** Firm specific 0000 Predicted intra-industry event study results

A comparison of the information conveyed by equity carve-outs, spin-offs, and asset sell-offs The evidence does not support the efficiency hypothesis that predicts similar subsidiary rival reactions to three different restructuring mechanisms. Rather it is more consistent with securities issuance hypothesis. Similar to the negative subsidiary rival reactions to carve-out, conventional IPO rivals also react negatively. On the contrary, going private transactions generate positive reactions to rivals. These results can be explained by securities issuance hypothesis. Subsidiary rivals react to spin-off positively. Subsidiary rivals do not react to sell-off, whether or not the proceeds are retained. This is consistent with the evidence that private financing (bank loans or private placements) is more value enhancing than public securities issuance, but inconsistent with free cash flow argument.