The Announcement Effect and Long-term Stock Performance Following Equity Carve-outs: The Study of US based Equity Carve-outs between 1999 until 2019

Frederik Runge von Bennigsen

Student thesis: Master thesis


The object of the thesis is twofold. First, it seeks to investigate the short-, medium-and long-term performance for parent firms and subsidiary firms following an equity carve-out transaction, for firms located in the United States in the period 1999-2019. The paper examines the stock price reaction around the announcement day of the equity carve-out for parents, and the initial public offering for subsidiaries. The reactions are measured using a market model and a market-adjusted model based on an event study approach using the abnormal returns and the cumulative abnormal returns (CAR) in the short-term. In the medium -and long-term a buy-and-hold abnormal return (BHAR) approach is adopted. Secondly, based on previous research, a characteristics analysis and an industry specific analysis several explanatory variables are used in a multivariate regression analysis to investigate the predictability of the short, -medium and long-term abnormal returns.
It concludes that when parent firms conduct an equity carve-out they experience positive CAR around the announcement day [-1;+1] using both the market model and the market-adjusted model. The findings are in line with the literature. The selected industries display different CAR, concluding that there is difference between the industries and the general data. Subsidiaries experience significant abnormal returns, also in line with the literature, but in contrast to the asymmetric information hypothesis. Further, subsidiaries display higher abnormal returns around the event day than parents. The medium-and long-term stock performance is examined using the market-adjusted model and the BHAR excluding the event date. The thesis finds insignificant positive medium-term BHAR for both parents and subsidiaries. Long-term it finds insignificant negative BHAR. It is concluded that parent firms display less volatility than subsidiaries and generate higher long-term risk-adjusted returns.
At last it conclude that several explanatory variables influence the BHAR over the different time horizons. The amount of Leverage respective to total assets is significant using the market mode land market-adjusted model for parents around the event day. Relatedness is where parent firms conduct an ECO within the same industry and is significant as well, as is subsidiary size. Abroad number of event day variables are found significant for the subsidiaries, such as Leverage, Crisis, Parent Size, Parent ROA and the sector High Technology. In the medium-term (90day) parent firm BHAR are influenced by the operational variables Leverage and ROA, measured at the time of the announcement. Subsidiaries incur a significant beta variable, indicating that the parent firms’ systematic risk is inherent for subsidiaries, and that it influences the medium-term BHAR (125 day) and the long-term (360 day) BHAR. It further concludes that the industries display different significant variables than the general data. In determining the long-term BHAR, leverage is significant on the 252-day horizon and ROA on the 360-day horizon for parents.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2020
Number of pages95