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Empirical Tests of Corporate Restructuring and Divestitures 12 Chapter.

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1 Empirical Tests of Corporate Restructuring and Divestitures 12 Chapter

2 Chapter 12-2 Event Studies of Restructuring AuthorsYearType Event Window Parent Return Miles, Rosenfeld1983Spinoff0,+13.34% Schipper, Smith1983Spinoff-1,02.84% Copeland et al1987Spinoff0,+12.49% Mulherin, Boone2000Spinoff-1,+14.51% Schipper, Smith1986Carveout-4,01.83% Mulherin, Boone2000Carveout-1,+12.27%

3 Chapter 12-3 Event Studies of Asset Sales AuthorsYear Event Window Seller Return Buyer Return Rosenfeld1984-1,+12.76%2.10% Jain19850.44%0.34% Hite et al1987-1,01.66%0.83% Hanson, Song2000-1,+10.60%0.48% Mulherin, Boone2000-1,+11.75%1.34%

4 Chapter 12-4 Sources of Wealth Gains  Studies of restructuring often find the larger the divestiture, the larger the announcement return  Asset sales: returns to buyer and seller likely represent efficient redeployment of assets  Information vs. Efficiency Unsuccessful asset sales lose gains from announcement – Efficiency (Hite et al, 1987) Wealth effects related to ratio of subsidiary to parent – Efficiency (Vijh, 2002) Announcement causes negative stock returns to competitors – Efficiency (Hulburt et al, 2002)

5 Chapter 12-5 Corporate Focus  Corporate focus possible source of gains: executives better able to monitor firm with narrow scope  Studies compare related and unrelated divestitures – usually using SIC codes (imperfect measure)  Some evidence that divestiture of unrelated subsidiaries (compared to related) had higher returns in 1980s vs. 1990s – corporate focus can’t explain all gains in divestitures

6 Chapter 12-6 Event Studies of Relatedness AuthorsYearType Win- dow Related Return Unrel. Return Daley et al1997Spinoff-1,01.6%4.5% Desai, Jain1999Spinoff-1,+12.71%4.45% Boone200080s spinoff 90s spinoff Carveout -1,+1 0.85% 4.07% 2.91% 4.07% 4.82% 2.76% Vijh2002Carveout-1,+10.80%2.34% Hulbert et al2002Carveout-1,+10.98%2.10%

7 Chapter 12-7 Corporate Focus  Focus, diversification, and firm value Focus increased in 1980s – firm value also increased (but many alternative explanations) Multi-segment firms tend to have lower values  Is there a diversification discount? Difficult to measure link between focus and value Difficult to quantify “diversification discount” Acquisitions create wealth, but Graham et al (2002) found reduces excess value in combination – conclude methods of measuring conglomerate discounts must be reconsidered

8 Chapter 12-8 Choice of Divestiture Methods  Spinoffs vs. asset sales – choice depends on tax implication and financial constraints  Spinoffs vs. equity carve-outs – firms choose carve-outs when subsidiary has more growth opportunities (parent often keeps stake long term)  Organizational choices balance cost of market transactions and cost of firm hierarchy

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