Managerial Incentives Explanation of Equity Carve-Outs Initial Returns

53 Pages Posted: 10 Dec 2015 Last revised: 19 Aug 2017

Date Written: December 1, 2015


This paper studies the first day return of 227 carve-outs during 1996-2013. I find that the first day return of newly issued subsidiary stocks is explained by the reporting distortions in the pre IPO period, conditioned on whether the executives and directors of the subsidiary received stock options with an exercise price equal to the IPO offer price. In absence of IPO options, accruals in the year before the issue are negative predictors in the cross-sectional variation of the first day returns. In presence of IPO options this relationship is reversed and becomes positive: this is especially pronounced in cases where non-employee directors received such compensation packages. The predictive power of the accruals on future returns and its direction differ depending on the executive compensation packages, suggesting that management intentionally manipulate earnings.

Keywords: Earnings management, Initial public offerings, IPO underpricing, Equity carve-outs, Executive compensation, Stock options

JEL Classification: M41, G24, G32, G34, J33

Suggested Citation

Seistrajkova, Biljana, Managerial Incentives Explanation of Equity Carve-Outs Initial Returns (December 1, 2015). Available at SSRN: or

Biljana Seistrajkova (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

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