Long-term returns from equity carveouts

Using a sample of 628 carveouts during 1981-1995, this paper finds that the newly issued subsidiary stocks do not underperform appropriate benchmarks over a three-year period following the carveout. This result is in striking contrast with the documented poor performance of initial public offerings and seasoned equity offerings. I conjecture that the superior performance o f subsidiary stocks arises because the subsidiary and parent firms can focu s on fewer business segments after carveout, and because the parent firms c ontinue to own a monitoring position in the subsidiary firms. I test whethe r the subsidiary stock performance is related to the number of business seg ments the parent firm has before carveout. The relationship is not always s ignificant, which suggests another possible explanation, that the market ma y react efficiently to the likely future performance of carveouts. (C) 1999 Elsevier Science S.A. All rights reserved.