Price Returns from Equity Carve-out and Divesture Initial Public Offerings: A Longitudinal Study by ProQuest

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									394     International Journal of Management             Vol. 26 No. 3    December 2009


Price Returns from Equity Carve-out and Divesture
Initial Public Offerings: A Longitudinal Study
Darshan Sachdeva
California State University Long Beach
Neil Shah
California State University Long Beach

This study investigated the price returns from 35 equity carve-out and 11 divesture
initial public offerings (IPOs) over a 13 month period The findings based on this
investigation suggest that the carve-out IPOs were found to be under-priced. This study
also demonstrated that abnormal returns did occur for carve-outs and divesture initial
public offerings. Also, it was found that the standard deviation on the returns increased
for long term investors, suggesting a greater variability in returns and increased risk
level for such investments.
                                      Introduction
Initial Public Offering (IPO) refer to those stocks that a company sells to the public for
the first time.
Equity carve-out refer to a parent corporation creating and selling stock in a subsidiary to
the public while keeping control. IPO carve-outs refer to these new issues of corporate
subsidiaries that went public. IPO carve-outs, also known as IPO spin-offs, have started
to become popular in the 1990’s and performance of the carve-out stocks has been
strong, as noted by the Mergers & Acquisitions magazine (May/June 1993) the average
returns for carve-outs for 1991 was 35.6% and 34.6% for 1992. Divestures use IPOs
as a vehicle to sell businesses to the general rather than selling the business to large
investors or corporations.
Several studies seem to suggest that IPOs generate large short term if the stock is
purchased at offer price. As for example, Ritter (1984) found that the mean return in
IPOs purchased at offering price and sold at the first day close was 48.4% during the
“hot issue” period and 16.3% during the “cold issue” period. Ritter defined hot issue
market as a period where a large proportion of the firms going public have a high risk,
and cold issue market where large proportion of the issues have low risk. In another
study by Ibbotson (1975) it was seen that IPOs yielded an average return of 11.4% in
the month following the offering for the period 1960 to 1969. Ibbotson reasoned that
in order to compensate the large brokerage firms to bear the risk of selling new issues,
the underwriter offers price discou
								
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