Allocative Efficiency of Internal Capital Markets: Evidence from Equity Carve-outs by Diversified Firms

47 Pages Posted: 4 Oct 2018

See all articles by Puliyur Sudarsanam

Puliyur Sudarsanam

Cranfield University - School of Management

Siyang Tian

Southwestern University of Finance and Economics (SWUFE)

Valeriya Vitkova

M&A Research Centre, City, University of London, Sir John Cass Business School

Date Written: September 19, 2018

Abstract

We examine whether equity carve-outs (ECOs) lead to improvements in the functioning of the internal capital markets (ICM) of diversified firms. Divestments, including spin-offs, sell-offs and ECOs, can be employed by firms to improve allocative efficiency. Equity carve-outs, unlike spin-offs and sell-offs, leave the parent’s ICM intact but provide the opportunity to enhance internal and external corporate governance mechanisms. Using a US sample of 354 ECOs completed between 1980 and 2013, we find that the allocative efficiency of parents is augmented significantly following ECOs. This increase in allocative efficiency is driven by improvements in the governance characteristics of parent companies.

Keywords: Internal Capital Markets, Equity Carve-outs, Corporate Governance

JEL Classification: G32; G34

Suggested Citation

Sudarsanam, Puliyur Sudi and Tian, Siyang and Vitkova, Valeriya, Allocative Efficiency of Internal Capital Markets: Evidence from Equity Carve-outs by Diversified Firms (September 19, 2018). Available at SSRN: https://ssrn.com/abstract=3251910 or http://dx.doi.org/10.2139/ssrn.3251910

Puliyur Sudi Sudarsanam

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Siyang Tian

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Valeriya Vitkova (Contact Author)

M&A Research Centre, City, University of London, Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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