Vertical Divestitures Through Equity Carve-Outs and Spin-Offs: A Product Markets Perspective
55 Pages Posted: 19 Sep 2009 Last revised: 16 Sep 2015
Date Written: September 18, 2009
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: Suggested Citation