The Market-Timing Characteristics of Equity Carve-Outs
30 Pages Posted: 25 May 1999
Date Written: May 10, 1999
Abstract
Equity carve-outs appear to accurately correlate with the peak in an overvalued stock market. We base this conclusion of market timing on four findings in a sample of 265 carve-outs undertaken by publicly traded parents between 1981 and 1995. First, the mean return on the value-weighted NYSE, AMEX and NASDAQ market over the year before the carve-out is substantially above the unconditional expected return on the market. Second, this same pre-carve-out mean market return is substantially greater than the mean return on the market over the year after the carve-out. Third, maximum likelihood estimation indicates that the return on the market drops 16 days prior to when the carved-out subsidiary stock is issued. Fourth, carve-outs are contrarian predictors of future one-year market-wide returns, even after controlling for rational determinants of future market returns.
JEL Classification: G14, G34
Suggested Citation: Suggested Citation
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