Unless otherwise noted, event date is announcement date of transaction.
*Significant at the 0.99 level or better.
†Significant at the 0.90 level.
‡Significant at the 0.95 level.
EXHIBIT 6.19 Summary of Studies of Market Returns to Parent Shareholders at Creation of Tracking Stocks
| Study | Cumulative Abnormal Returns at the Event | Cumulative Abnormal Returns after the Event | Sample Size | Sample Period |
|---|---|---|---|---|
| Haushalter, Mikkelson (2001) | +3.00%* full sample (days –2,+2) | 31 | 1994–1996 | |
| Billet, Vijh (2000) | +2.67%* | Parent company1.07% (1 yr.) –5.77% (2 yrs.) –4.15% (3 yrs.) Tracking stock +9.74% (1 yr.) –15.26% (2 yrs.) —40.05%† (3 yrs.) | 20 | 1984–1998 |
| Elder, Westra (2000) | +3.1%* full sample (days –1,0) | N/A | 35 | 1984–1999 |
| D’Souza, Jacob (1999) | +3.61%* full sample (days –1,+1) | 64 | 1984–1997 | |
| Logue, Seward, Walsh (1996) | +2.9%† (days –1,0) | N/A | 8 | 1985–1994 |
| Chemmanur, Paeglis (2001) | +3.09%* (days –1,+1) | 19 | 1984–1998 |
Unless otherwise noted, event date is announcement date of transaction.
*Significant at the 0.99 level or better.
†Significant at the 0.95 level.
Fourth, the types of transactions do differ in their effects. Though the diagrams in Exhibit 6.14 suggest a strong similarity in their resulting structures, in fact the transaction types have materially different impacts: Tracking stocks do not result in increased focus, tax, or regulatory benefits, only increased transparency. Split-offs alter the ownership of the parent; carve-outs, like divestitures, change the ownership of the subsidiary. In a spin-off, no new funds flow to the parent—Anderson (2002) finds that the need to raise additional capital is significant in explaining the type of transaction chosen. Parrino (1997) documents a major transfer of wealth from bondholders to stockholders from a spin-off effected by Marriott Corporation. The variation in returns across transaction type could be explained by any of these factors: agency costs, internal capital markets, information, control, and so on. Notwithstanding the differences among the forms of these transactions, abnormal returns from these transactions are generally consistent: spin-offs return roughly 2 to 4 percent, compared to carve-outs of 2 to 3 percent, and tracking stocks of 3 percent.
Fifth, as with divestitures, deployment of funds raised in these transactions makes a difference. Allen and McConnell (1998) found a large difference in announcement day returns: Investors reacted positively to carve-outs that would generate cash to be paid to creditors; instances where the funds were to be reinvested in the business were met with zero response from investors.
Sixth, the restructuring has an impact on the rivals of the firm. Hurlburt et al. (2002) found that the effect of carve-out announcements on the returns of rival firms was significantly negative.
Seventh, the timing and type of the restructuring seems to be associated with the valuation of the parent and subsidiary in the capital markets. Nanda (1991) suggests that opportunistic behavior by managers will motivate them to favor carve-outs over divestitures when the parent’s shares are relatively undervalued and the subsidiary’s shares are relatively overvalued. Thus, a sale of equity in the subsidiary would become a signal to investors of the parent’s undervaluation. The findings on carve-out announcement returns in Exhibit 6.18 generally support such a hypothesis. For instance, Schill and Zhou (2001) write, “Overall, the evidence can best be explained with models where clienteles of investors with optimistically biased expectations drive the prices of subsidiaries above parent valuations and arbitrage costs prohibit market forces from eliminating the disparity between parent-subsidiary valuations.” (Page 27)
The hypotheses about the sources of gains from restructuring center predominantly on two: an agency cost argument that increased focus cures ills of internal capital markets; and hypotheses about exploiting misvaluations in the market. These hypotheses are not mutually exclusive. But the research supports the existence of both sources, giving, perhaps, more weight to the agency cost hypothesis on the grounds of the number of studies confirming the value of corporate focus.
FRAMEWORK FOR CHOOSING A PATH FOR INORGANIC GROWTH
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