Vertical Divestitures Through Equity Carve-Outs and Spin-Offs: A Product Markets Perspective

55 Pages Posted: 19 Sep 2009 Last revised: 16 Sep 2015

See all articles by Bharat A. Jain

Bharat A. Jain

Towson University

Omesh Kini

Georgia State University

Jaideep Shenoy

University of Connecticut

Date Written: September 18, 2009

Abstract

Using a product markets perspective to investigate the decision to vertically disintegrate, we find that vertical divestitures are more likely in response to positive industry demand shocks, favorable industry financing conditions, and lower parent firm relative productivity and are less likely when the potential for contracting problems is high. Conditional on vertical divestitures, equity carve-outs are more likely in environments in which relationship-specific investments are more prevalent and when the need for external funds is high, while spin-offs are more likely in larger industries and in industries that experience positive demand shocks. Our examinations of announcement-period wealth effects and changes in operating performance indicate that vertical divestitures are motivated by efficiency considerations.

Keywords: Vertical Divestitures, Equity Carve-outs, Spin-offs, Product Markets

JEL Classification: G34, L22, L25, D57

Suggested Citation

Jain, Bharat A. and Kini, Omesh and Shenoy, Jaideep, Vertical Divestitures Through Equity Carve-Outs and Spin-Offs: A Product Markets Perspective (September 18, 2009). Journal of Financial Economics, 2011, 100(3), 594-615, Available at SSRN: https://ssrn.com/abstract=1475380

Bharat A. Jain

Towson University ( email )

8000 York Road
Towson, MD 21252
United States
410-704-3542 (Phone)

Omesh Kini (Contact Author)

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Jaideep Shenoy

University of Connecticut ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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