Working Paper: CEPR ID: DP6268
Authors: Enrico C. Perotti; Silvia Rossetto
Abstract: Equity carve outs, the partial listing of a corporate subsidiary, appear to be transitory arrangements, usually dissolved within a few years by either a complete sale or a buy back. Why do firms perform expensive listings just to reverse them thereafter? We interpret carve outs as strategic options to attract information from the market over the relative value of a productive unit as an independent entity and thus to improve the decision process on whether to sell out or to retain control. The separate listing is costly, as it reduces coordination of production, but generates valuable information from the market over the optimal allocation of ownership. We compute the optimal timing for the final sale or buy back decisions, the value of the strategic options embedded in the carve out and the optimal shares retained. The model explains the temporary nature of carve outs, and suggests an explanation for many empirical findings. In particular, it explains why carve outs are more common in sectors with high uncertainty and in more informative markets.
Keywords: buy back; equity carve out; real options; spin off; vertical integration
JEL Codes: G13; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| equity carve outs (G34) | information about the value of a subsidiary (G32) |
| uncertainty surrounding synergies (D89) | decision to perform a carve out (G34) |
| timing of sell outs and buy backs (L14) | percentage of shares retained by the parent (G32) |
| information gained from carve out (G34) | decision-making process regarding control of subsidiary (G34) |
| carve outs (Y60) | frequency of ECOs in high-growth sectors (O49) |
| high uncertainty and informative markets (D89) | likelihood of carve outs (G32) |