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Abstract
We nd that listed parents carve-outs have investment-cash-ow sensitivities
70 per cent lower than unlisted parents carve-outs, on average. Such a nding is
stronger when we consider only equity carve-outs in technological industries.
The nding suggests that listed parents are more capable of alleviating the nancial constraint of their carved-out units than private parents. Our further analysis
shows that listed parents carve-outs also have a lower cost of equity than their
counterparts, but such dierence cannot be explained by corporate transparency,
as implied by analyst coverage and analysts forecast dispersion. Therefore, we
argue that the benets from aliation with a listed parent to the carve-out come
mainly from the parents nancial support rather than an increase in corporate
transparency.
Key words: Equity carve-outs; Implied cost of equity; Financial constraint;
Investment-cash-ow sensitivity; Listed parent
JEL classication: G30, G34
doi: 10.1111/j.1467-629X.2012.00503.x
1. Introduction
In a typical equity carve-out, the parent rm sells a minority stake in one of its
private units to the public through an initial public oering (IPO), retains the
I thank an anonymous referee, Robert Fa (the Editor), Vidhan K. Goyal, Issac Otchere,
Jungwon Suh and the participants of the 18th Conference on the Theories and Practices
of Securities and Future Markets for valuable comments on the manuscript. All remaining errors are mine. I also gratefully acknowledge the University of Macau Research
Grant (Ref.: RG013/09-10S/THK/FBA) for supporting the project.
Received 30 October 2011; accepted 15 July 2012 by Robert Fa (Editor).
2012 The Author
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276
Some indirect evidence does exist. Shin and Stulz (1998) nd that capital investment by
a segment of a diversied rm depends on other segments cash ows. Allen and Phillips
(2000) and Fee et al. (2006) show that the existence of a productmarket relationship
between two rms might cause one to hold a block ownership of the other to resolve contracting problems. Atanasov et al. (2010) nd that the carve-out parent has stronger
incentives to expropriate the carved-out unit if it holds a only minority stake of the unit
than if it holds a majority ownership. Slovin and Sushka (1997) and Vijh (2006) test the
strategic nancing hypothesis by Nanda (1991), but they produce mixed results.
For example, it is documented that in Japan, group parents are ready to help group
members through inter-rm transactions (Morck and Nakamura, 1999). Borisova and
Megginsons (2011) study privatizations in Europe and nd that privatized rms tightly
controlled by government have lower costs of debt than privatized rms loosely controlled by government. They argue that the governments shareholding can be viewed as
an implicit assurance of repayment.
For example, in PepsiCos carving out of Pepsi Bottling, PepsiCo provides a guarantee
of $2.3 billion of debt of Pepsi Bottling. In Network Associates carving out of McAfee.
com, Network Associates makes available to McAfee.com a revolving loan of up to
$30 million.
277
This study examines the nancial constraint of the sample carved-out rms by
employing two empirical strategies. First, it relates the rms capital investment and research and development (R&D) expenses to their cash ows and
valuations. In an ecient capital market without market frictions, a rms capital investment should depend on its investment opportunities only. If market
frictions exist because of hidden-information problems, agency problems, etc.,
however, a rms cost of external nancing will be higher than its cost of internal
funding, and therefore its investment will be positively related to its cash ow
(Fazzari et al., 1988) and market valuation (Baker et al., 2003).
Second, this study examines the implied cost of equity capital of the carveouts. We use the implied cost of equity developed in previous studies rather than
realized stock return as a proxy for the ex ante cost of equity, because Fama and
French (1997), Dhaliwal et al. (2005), and Hail and Leuz (2006) argue that realized stock return is not a good proxy for the cost of equity. Studies in accounting
and nance also show that the implied cost of equity is lower for rms with better disclosure (Botosan, 1997; Chen et al., 2010) and less nancial constraint
(Chen et al., 2011).
To summarize, this study yields the following major ndings:
1. Listed rms carve-outs have an average investment-cash-ow sensitivity that
is 80 per cent lower than that of unlisted rms carve-outs within 3 years after
transactions, when R&D expense is considered as part of the investment. This
indicates that R&D-intensive rms are subject to nancial constraint, which is
more severe if rms are aliated with unlisted parents. The nding echoes Fee
et al.s (2006) result that in a buyersupplier relationship, the buyer is more
likely to hold an equity stake of the supplier if the supplier is more R&D
intensive, because R&D activities are vulnerable to contractual frictions.
2. To conrm the above conclusion, the sample carve-outs are partitioned into
two groups: technological rms and non-technological rms, because technological rms are generally perceived to be more R&D intensive. The result
shows that the impact of parents listing status on its carve-outs investmentcash-ow sensitivity is signicant only among technological carve-outs.
3. Listed rms carve-outs have an average implied cost of equity 1.3 per cent
lower than that of unlisted rms carve-outs, after controlling for rm and
deal characteristics and various proxies for risks. Parents listing statuses,
however, do not have signicant impacts on the analyst coverage of the
carve-outs and the dispersion of analyst forecasts for the carve-outs earnings
per share (EPS).
Collectively, the above ndings suggest that listed parents help their carve-outs
reduce nancial constraint more than unlisted parents do. Inconsistent with the
corporate-transparency hypothesis, however, listed rms carve-outs are not
more transparent than unlisted rms carve-outs, in terms of both analyst coverage and analyst forecast dispersion. Therefore, we infer that listed parents
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alleviate their carve-outs nancial constraint by providing more nancial supports to the units, rather than making the units more transparent.
This study sheds light on the related literature in several ways. First, as
opposed to studies on equity carve-outs that focus on the parents from various
perspectives, this study examines equity carve-outs from the perspective of the
carved-out units.4
Second, although block ownership by corporations is quite common in the
United States, few studies examine its impacts on group subsidiaries. This study
shows that aliation with a listed parent can reduce the carve-outs nancial
constraint in the United States. It complements Atanasov et al. (2010), who
examine the parents incentive problems when it holds a partial equity stake of
the carved-out unit. It is also related to a number of studies for Japan that suggest group aliation can enhance a rms nancial exibility (Hoshi et al., 1990,
1991; Morck and Nakamura, 1999; Chang et al., 2010).
Third, this study sheds light on studies on the benets of going public, which
nd that private rms enjoy a lower cost of debt (Pagano et al., 1998) and a
broader shareholder base (Chemmanur and Fulghieri, 1999) after going public
and that nancial managers view an IPO as a strategic option for future acquisitions (Brau and Fawcett, 2006). This study provides further indirect evidence on
the value of going public by showing that listed parents are more resourceful
than unlisted parents in resolving group subsidiaries nancial constraint.
The rest of the paper is organized as follows. Section 2 reviews the literature
and develops major hypotheses. Section 3 describes the data and methodology.
Section 4 reports the summary statistics of key variables and the time-series statistics of corporate investment and related variables. Section 5 reports the results
from the regressions of carved-out units investment. Section 6 reports the results
from the analysis of carved-out units implied costs of equity. Section 7
concludes.
2. Literature review and development of hypotheses
2.1. Financial constraint and corporate investment decisions
Financial constraint refers to the situation where a rm cannot fund all of the
positive net present value projects because of a wedge between its internal cost of
nancing and its external cost of nancing (Kaplan and Zingales, 1997). Financial constraint has big impacts on a rms investment and nancing activities.
4
Those studies focus on parents eciency of pricing (Schill and Zhou, 2001; Hogan and
Olson, 2004; Lamont and Thaler, 2003; Benveniste et al., 2008), long-term stock performance (Vijh, 1999) and operating performance (Boone et al., 2003; Powers, 2003), and
motivations in terms of use of proceeds (Allen and McConnell, 1998), restructuring
(Schipper and Smith, 1986; Vijh, 2002; Powers, 2003) and information production (Perotti
and Rossetto, 2007).
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Fazzari et al. (1988) theoretically and empirically show that, compared with
unconstrained rms, nancially constrained rms rely more on their ability to
raise costly external nancing, and therefore their investments will be more sensitive to their operating cash ows. Motivated by Fazzari et al., Hoshi et al.
(1991) nd that in Japan, group-aliated rms have lower investment-cash-ow
sensitivities than unaliated rms, consistent with their argument that groupaliated rms are less constrained because group banks are informed about their
group members.
In contrast, Kaplan and Zingales (1997) and Baker et al. (2003) show that a
rms investment-cash-ow sensitivity may not reect its nancial constraint.
Baker et al. further nd that more nancially constrained rms, as classied by
an index developed by Kaplan and Zinagles (KZ index), have investments more
sensitive to rm valuation than less constrained rms. They argue that nancially
constrained rms rely on costly equity nancing for investments and will raise
equity only when their shares are relatively expensive. Chen et al. (2007), however, show that investment is sensitive to rm value because managers learn from
stock prices about their own rms fundamentals and use the information in
their investment decisions.
Brown and Petersen (2009) argue that R&D is likely an equity-dependent
investment that is sensitive to the availability of cash ow because many R&Dintensive rms use little debt because of information-related problems. In contrast, physical investment is generally nanced by external debt (if necessary) that
is less information sensitive. The implication is that it is important to consider
R&D also when examining the impact of cash ow on corporate investment,
especially for newly listed rms that come from technological industries.
2.2. Benets of group aliation to the rm
Studies for the US market show that group aliation results in lower nancial
constraint. Shin and Stulz (1998) nd investment by a segment of a diversied
rm depends not only on its own cash ows but also on other segments cash
ows. This suggests that resource reallocations exist among units of a conglomerate. Similar evidence is also observed in the US market. Khanna and Tice
(2001) examine investment decisions of discount rms in response to Wal-Marts
entry and nd that discount divisions of diversied rms act more quickly than
focused rms do, and their capital expenditures are also more responsive to their
productivity. All the above studies illustrate the importance of parents nancial
resources for their subsidiaries.
Previous studies for Japan also show that cash-rich parent rms can help their
subsidiaries get through nancial constraint. Hoshi et al. (1990) nd that Japanese rms are less aected by nancial distress if they have a stronger tie to a
main bank. Similarly, Morck and Nakamura (1999) show that main banks in
Japan are ready to step in and bail out the troubled group rms. Chang et al.
(2010) nd that group-aliated rms have a stronger ability to time the capital
2012 The Author
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market than unaliated rms and that aliated rms redeploy the capital from
market timing within the group.
2.3. Benets from aliation with listed parents
A number of theoretical studies in the IPO literature show that going public
can reduce a rms cost of capital by improving its reputation, increasing its investor base, gaining investor recognition and attracting analyst coverage. Few studies quantify the benets of going public, however. Only Pagano et al. (1998) show
that in Italy, a rms cost of bank credit declines by 2847 basis points for up to
3 years after IPO. They argue that bank credit costs less after IPO because more
information is available after listing or because of stronger bargaining power visa`-vis banks. Therefore, we expect that compared with private parents, listed parents face a lower cost of capital and have better access to external capital markets.
As a result, listed parents should be more capable of helping their subsidiaries get
out of nancial constraint by providing either direct support (such as direct loans
or inter-rm transactions) or indirect support (such as loan guarantees).5
Besides, having the group parent listed increases the transparency of the carveout because the listed parent has to disclose its own nancial conditions to investors, which can help the carve-outs shareholders assess the prospects of their
investments more accurately and revise their expectations about the carve-out if
the parents nancial conditions change. Botosan (1997) and Chen et al. (2010),
among others, show that rms with better disclosure enjoy a lower cost of equity
capital. Therefore, we expect that listed rms carve-outs should have a lower
cost of equity capital than unlisted rms carve-outs.
2.4. Development of hypotheses
Fazzari et al. (1988) argue that a rms investment-cash-ow sensitivity reects
its nancial constraint problems, and more constrained rms should have more
positive sensitivities than less constrained rms, while Baker et al. (2003) nd
that more constrained rms also have more positive investment-valuation sensitivities. Therefore, if listed rms carve-outs are less nancially constrained than
unlisted rms carve-outs, we hypothesize the following:
H1a: Listed rms carve-outs have less positive investment-cash-ow (investmentvaluation) sensitivities than unlisted rms carve-outs.
5
Examining a series of equity carve-outs by Thermo Electron, Allen (1998) nds that
subsidiaries managers are granted with stock options of both the subsidiaries and the
parent, and services agreements also exist between the parent and the subsidiaries. Jain
et al. (2009) nd that an equity carve-out is more likely to be used than a spin-o as a
method of divestiture if explicit productmarket agreements exist between the parent and
the subsidiary after the event.
281
Besides, the impact of parents listing status is likely to be stronger on carveouts in technological industries than on those in non-technological industries for
two reasons. First, technological rms are generally more nancially constrained
than non-technological rms because they require more capital for investments,
especially the R&D, but they are usually less protable. Second, high-R&D rms
are prone to monitoring problems and contractual frictions (Fee et al., 2006),
and therefore the property rights of the shareholders of such rms are less protected. Brown and Petersen (2009) argue that R&D is more equity dependent
than physical investment. The presence of more resourceful parent rms can
build up investors condence in those rms. Following our arguments, we
expect that having a listed parent will be more important for carve-outs in technological industries than for carve-outs in non-technological industries. We
hypothesize the following:
H2: Listed rms carve-outs in technological industries have less positive investment-cash-ow (investment-valuation) sensitivities than unlisted rms carve-outs
in technological industries, while listed rms and unlisted rms carve-outs in nontechnological industries have equal investment-cash-ow (investment-valuation)
sensitivities.
As mentioned above, the interpretations of investment-cash-ow and investment-valuation sensitivities are not unequivocal. Therefore, we also compare
the costs of equity capital of listed rms subsidiaries with those of unlisted
rms subsidiaries. A large volume of studies in accounting examines the
ex ante cost of equity, implied from stock price and analysts earnings forecasts, and nds that a rms cost of equity is lower for rms with better disclosure (Botosan, 1997; Chen et al., 2010), and less nancial constraint (Chen
et al., 2011).
The eect of corporate disclosure and the eect of nancial constraint on the
cost of equity are not necessarily independent, as Kaplan and Zingales (1997)
suggest that hidden information problems, agency problems, etc., can aect a
rms nancial constraint. To distinguish the above two eects, we examine
other metrics of information asymmetry, namely analyst coverage and analyst
forecast dispersion. Previous studies nd that better disclosure attracts more
nancial analysts. In addition, with more information disclosed, nancial analysts should have more agreement about the subsidiarys future earnings (Krishnaswami and Subramaniam, 1999; Gilson et al., 2001). Therefore, we
hypothesize that.
H3a: Listed rms carve-outs have a lower cost of equity than unlisted rms
carve-outs.
H3b: Listed rms carve-outs have more analyst coverage and lower analyst
forecast dispersion than unlisted rms carve-outs.
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Our classication is not perfect. Besides private companies, foreign-listed rms or rms
listed on regional exchanges may also be uncovered by the CRSP. Considering those rms
as unlisted, however, is suitable for our purpose because foreign-listed companies generally have limited access to the US capital market and companies listed on regional
exchanges are usually small. As a result, their subsidiaries are likely to be nancially constrained also.
In a robustness check, we remove rm-years in which the value of R&D expense is missing and the main results remain the same.
283
2006
X
cj Yeari;j;t ei;t :
i1981
284
A clean surplus relation assumes a rms earnings will either be distributed to shareholders as cash dividends, or be retained for investments and become part of the equity.
Therefore, if both future earnings and the dividend payout ratio are known, we can predict perfectly the book value of equity in the future.
10
Empirical supports for the use of implied cost of equity do exist. For example, examining G-7 countries, Pastor et al. (2008) nd a positive relation between the conditional
mean and variance of stock returns at both country and world market levels, conrming
a trade-o between risk and return.
11
285
12
The underwriter ranking is a 9-point rank (09) developed by Carter and Manaster
(1990) and updated by Loughran and Ritter (2004). It is available on the homepage of
Jay R. Ritter at http://bear.warrington.u.edu/ritter/.
286
Table 1
Distribution of equity carve-outs by year and listing status of parent companies
Year
All cases
Unlisted parents
Listed parents
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
1
14
7
45
20
29
44
39
16
19
15
33
50
78
54
29
44
26
20
37
21
11
6
1
3
3
4
669
0
6
3
24
11
15
21
21
4
3
8
14
34
62
35
15
19
13
8
18
12
5
2
0
3
0
0
356
1
8
4
21
9
14
23
18
12
16
7
19
16
16
19
14
25
13
12
19
9
6
4
1
0
3
4
313
The sample consists of 669 equity carve-outs between 1980 and 2006, 356 of them carried out by
unlisted parent rms and 313 of them carried out by listed parent rms. It includes only initial public
oerings of common stocks that are intended to be listed on the US stock exchanges. Carve-outs in
which the parent names are the same as the carved-out units names and for which we cannot nd
the carved-outs stock price data on the CRSP are excluded. Equity carve-outs in utility industries
(SIC 49004999) and nancial industries (SIC 60006999) are also excluded.
39.5 (30.8)
21.4 (0.0)
4.92 (4.93)
0.70 (0.49)
0.30 (0.25)
2.04 (1.51)
0.20 (0.21)
1.80 (1.79)
)5.44 ()5.45)
6.51 (5.82)
7.6 (8.8)
0.32 (0.25)
21.4 (0.0)
40.1 (33.3)
6.8 (2.4)
154 (48)
423 (131)
(5)
Non-tech
5.10 (5.00)
1.95* (1.95)*
0.69 (0.45)
1.17 (0.63)
0.23 (0.15) )1.30 ()1.22)
2.51 (1.63)
1.09 ()0.28)
0.09 (0.19) )0.48 ()1.08)
1.97 (1.95)
4.24*** (4.02)***
41.5
2.48**
7.6 (8.5)
0.87 (0.57)
0.35 (0.30) )1.89* ()2.08)**
0.44 ()0.19)
2.26** (1.64)
2.04** (1.99)**
12.5 (2.8)
221 (50)
671 (140)
(2)
(3)
Unlisted parents Listed parents
(1)
All cases
Table 2
Carved-out units and oering characteristics
0.84 (0.74)
)1.84* ()4.85)***
)7.48*** ()7.42)***
5.99*** (6.12)***
)5.03*** ()2.20)**
1.23 (0.98)
)2.46** ()1.56)
6.84*** (6.76)***
)1.48 ()1.19)
)1.80* ()2.64)***
)5.30*** ()3.43)***
0.68 ()0.65)
2.11** (0.42)
5.04 (4.98)
0.56 (0.34)
0.15 (0.05)
3.05 (2.31)
)0.06 (0.17)
1.88 (1.79)
7.2 (8.0)
0.47 (0.48)
17.3 (0.0)
36.4 (29.1)
20.8 (5.3)
182 (45)
713 (132)
(6)
Tech
Initial return is the percentage change from the oer price to the closing price on the rst trading day. Gross proceed is the amount of funds raised in the
carve-out, including proceed from the sale of both primary shares and secondary shares. Market value of subsidiary is the rst-day closing price multiplied
by the number of shares outstanding. Percentage of subsidiary sold is the number of shares sold divided the number of shares outstanding aftermarket. Percentage of shares sold secondary is the secondary shares sold as a percentage of total shares sold. Fraction of hi-tech issues is the percentage of rms belonging to technological industries, as dened by the SDC. Underwriter ranking is a 9-point rank (09) developed by Carter and Manaster (1990) and updated
by Loughran and Ritter (2004), available on the homepage of Jay R. Ritter at http://bear.warrington.u.edu/ritter/. Primary proceed is the amount of cash
(in $ million) raised by the carved-out rm. Firm size is the market value of equity of the carved-out unit. B/M is the book value of equity divided by the
market value of equity. Leverage ratio is the sum of short-term debt and long-term debt divided by the sum of short-term debt, long-term debt and shareholders equity. Tobins Q (Q) is dened as book value of total assets plus market capitalization minus book value of equity and deferred taxes, scaled by
book value of total assets. Operating cash ow (CF) is dened as operating income before depreciation scaled by lagged total assets. Analyst coverage (ANALYST) is the number of nancial analysts who provide at least one EPS forecast (for any scal period) in the year. Dispersion of forecasts (DISP) is the
yearly average of the monthly standard deviation of outstanding EPS forecasts for the current scal period (scal period indicator = 1) as of the cut-o date
set by I/B/E/S scaled by stock price per share. Equity premium (EPREM) is estimated as follows. For each month, we estimate a rms implied cost of equity
capital following the four methods by Claus and Thomas (2001), Gebhardt et al. (2001), Ohlson and Juettner-Nauroth (2005) and Easton (2004) and using
the analysts forecast information from I/B/E/S. The estimated costs of equity are then subtracted by 10-year Treasury bond rate to get the equity premiums
and then averaged. If some of the measures cannot be calculated, we take the average of the available measures. Finally, we dene EPREM as the average of
the monthly equity premiums over a year. Summary statistics are reported for the whole sample, two samples that are formed based on the listing statuses of
parent rms (listed versus unlisted), and other two samples that are formed based on industry belongings (technological versus non-technological). t-test and
Wilcoxon rank-sum test are performed to test the dierences in means and medians between the two sub-samples. ***Signicant at the 1 per cent level.
**Signicant at the 5 per cent level. *Signicant at the 10 per cent level.
Table 2 (continued)
288
L. H. K. Tam/Accounting and Finance 54 (2014) 275299
0.26***
)0.07*
0.01
0.03
)0.15***
0.31***
0.02
)0.28***
0.03
0.01
)0.05
)0.15
0.11** 0.03
)0.03
)0.07
)0.06
0.12***
0.04
0.04
)0.04
)0.02
)0.01
0.16***
0.06
(3)
)0.07*
)0.09**
0.20***
0.04
0.02
0.19***
)0.12***
)0.15***
0.33***
)0.36***
0.14***
(2)
0.03
)0.06
)0.10**
0.10**
0.04
)0.08*
)0.29***
0.24***
)0.21***
0.05
(4)
0.08**
0.05
)0.05
0.04
)0.02
0.18***
(6)
)0.12***
0.12***
0.27***
0.02
0.66***
(7)
(9)
(10)
(11)
(12)
(13)
0.07*
)0.37*** )0.25***
0.00
0.09** )0.18***
)0.03
0.05
0.19*** )0.04
(8)
)0.09* )0.02
)0.21*** 0.15*** 0.04
)0.12** )0.15*** )0.20*** 0.18*** 0.05
0.03
0.64***
0.06
0.17***
)0.04
0.10**
0.37***
(5)
All variables are as dened in Table 2. ***Signicant at the 1 per cent level. **Signicant at the 5 per cent level. *Signicant at the 10 per cent level.
Correlations with absolute values larger than 0.3 are highlighted.
(1) Underpricing
(2) Pct of subsidiary sold (%)
(3) Pct of secondary shares
(4) Dummy for hi-tech issues
(5) Underwriter ranking
(6) Dummy for public parent
(7) Firm size in year 0
(8) B/M in year 0
(9) Leverage ratio in year 0
(10) Tobins Q in year 0
(11) CF in year 0
(12) Log(1 + ANALYST)
in year 1
(13) Log(DISP) in year 1
(14) EPREM in year 1
(1)
Table 3
Pairwise correlation analysis for the key variables
290
The mean value of CAPX is 0.100 and the values of standard deviation of CF and Q
are 0.261 and 1.835, respectively. Therefore, using the result in column (1), the marginal
eect of CF is 0.261 0.190/0.100 = 49.6 per cent and the marginal eect of Q is
1.835 0.006/0.100 = 11.0 per cent.
15
The mean value of CAPXRND is 0.137 and the standard deviation of CF (with R&D
added) is 0.241. Therefore, using the result in column (3), the marginal eect of CF is
0.241 0.308/0.137 = 54.2 per cent and the marginal eect of Q is 1.835 0.014/
0.137 = 18.8 per cent.
2012 The Author
Accounting and Finance 2012 AFAANZ
0.190 (0.035)***
)0.063 (0.042)
0.006 (0.003)**
0.192 (0.035)***
)0.065 (0.041)
0.005 (0.003)
0.003 (0.004)
0.003 (0.012)
0.039 (0.013)***
)0.004 (0.007)
0.003 (0.001)**
Yes
0.100
1,458
i1981
2006
X
cj Yeari;j;t ei;t :
0.044 (0.011)***
0.108 (0.016)***
0.013 (0.009)
0.002 (0.002)
Yes
0.206
1,458
0.308 (0.048)***
)0.220 (0.059)***
0.014 (0.003)***
0.312 (0.047)***
)0.225 (0.059)***
0.012 (0.005)***
0.003 (0.006)
0.040 (0.015)***
0.108 (0.016)***
0.013 (0.009)
0.002 (0.002)
Yes
0.206
1,458
(4)
Corporate investment (INV), the dependent variable, is dened in two ways. The rst one is capital expenditures scaled by lagged total assets (CAPX) (columns 1 and 2). The second one is capital expenditure plus research and development (R&D) expense scaled by lagged total assets (CAPXRND) (columns 3
and 4). We assume R&D expense to be zero if its value is missing. Explanatory variables are dened in Table 2. Indicating variables for years (Year) are
added to control for xed-time eects. We report heteroscedacity-consistent standard errors in parentheses. ***Signicant at the 1 per cent level. **Signicant at the 5 per cent level. *Signicant at the 10 per cent level.
b1 PUBLICi kControli
INVi;t a0 a1;1 CFit a1;2 PUBLICi CFi;t a2;1 Qi;t1 a2;2 PUBLICi Qi;t1
Our regression model for subsidiaries investments from year +1 to year +3 is constructed as follows:
(3)
(1)
(2)
CAPXRND
CAPX
Table 4
Investment decisions of carved-out rms whole sample regressions
292
other words, rms involving in more R&D are more likely to be nancially constrained.16,17
To show that the eect of parents listing status on carve-outs nancial constraint is stronger among carved-out rms in technological industries, we partition the carved-out rms into two groups: technological and non-technological,
according to the denition by the SDC. We then rerun the regressions in the
same manner as those above and report the results in Table 5. In columns (1 and
2), the dependent variable is CAPX. We do not observe a statistically signicant
dierence in investment-CF sensitivity between non-technological carve-outs of
listed parents and those of unlisted parents (column 1), as indicated by the insignicant coecient of PUBLIC CF. Consistent with H2, however, technological carve-outs of listed parents have signicantly lower investment-CF
sensitivities, that is, are less nancially constrained, than their counterparts (column 2), and the dierence is signicant at the 1 per cent level. In addition, they
have lower investment-Q sensitivities, as shown by the negative but marginally
signicant coecient of PUBLIC Q.
Columns (3 and 4) of Table 5 reports similar regressions with CAPXRND as
the dependent variable. Consistent with Panel A, non-technological carve-outs
of listed parents do not have a lower investment-CF sensitivity than their counterparts, while technological carve-outs of listed parents have much lower investment-CF than their counterparts.
Overall, consistent with H2, Table 5 suggests that technological carved-out
units are more likely to be subject to nancial constraint than non-technological
ones and aliation with a listed parent can reduce the constraint. At the same
time, however, the parents listing status does not aect a non-technological subsidiarys investment decisions.18
16
In a robustness check, we rerun the regressions using R&D expense only as the dependent variable. The results are consistent with those in columns (46).
17
In another unreported test, we compare the KZ index between listed rms and unlisted
rms carve-outs but do not observe a signicant dierence. The result may be owing to
the fact that carved-out units are not totally independent but belong to groups. Therefore,
their values of KZ index only partially reect their nancial conditions, without accounting for the inuence from their parents.
18
In a robustness check, we classify rms into two groups according to their exchange
listings: NYSE- and AMEX-listed rms in one group, and NASDAQ- and OTC-listed in
the other group. We do this because most technological rms are listed on the NASDAQ.
Our result (unreported) indicates that an aliation with a listed parent has a signicant
impact on NASDAQ-listed carve-outs only. In particular, NASDAQ- or OTC-listed
carve-outs have lower investment-CF sensitivities if they are aliated with listed parents,
but no such dierence is observed for NYSE- and AMEX-listed carve-outs. Our robustness check conrms our ndings in Tables 4 and 5.
0.164 (0.058)***
)0.164 (0.062)***
0.003 (0.003)
)0.007 (0.004)*
0.032 (0.016)**
0.020 (0.020)
)0.004 (0.006)
0.002 (0.002)
Yes
0.106
509
(2) Tech
i1981
2006
X
cj Yeari;j;t ei;t :
0.179 (0.051)***
)0.033 (0.073)
0.011 (0.007)
0.006 (0.009)
)0.010 (0.016)
0.042 (0.019)**
0.056 (0.035)
0.003 (0.002)*
Yes
0.119
949
(3) Non-tech
CAPXRND
0.419 (0.082)***
)0.356 (0.096)***
0.009 (0.006)
0.002 (0.007)
0.067 (0.025)***
0.154 (0.031)***
0.008 (0.010)
)0.000 (0.003)
Yes
0.280
509
(4) Tech
Corporate investment (INV), the dependent variable, is dened in two ways. The rst one is capital expenditures scaled by lagged total assets (CAPX). The
second one is capital expenditure plus research and development (R&D) expense scaled by lagged total assets (CAPXRND). We assume R&D expense to be
zero if its value is missing. Carved-out units are divided into non-technological (columns 1 and 3) and technological (columns 2 and 4) according to the denition by the SDC. Separate regressions are estimated for these two groups of rms. Explanatory variables are dened in Table 2. Indicating variables for
years (Year) are added to control for xed-time eects. We report heteroscedacity-consistent standard errors in parentheses. ***Signicant at the 1 per cent
level. **Signicant at the 5 per cent level. *Signicant at the 10 per cent level.
b1 PUBLICi kControli
INVi;t a0 a1;1 CFit a1;2 PUBLICi CFi;t a2;1 Qi;t1 a2;2 PUBLICi Qi;t1
Our regression model for subsidiaries investments from year +1 to year +3 is constructed as follows:
(1) Non-tech
Dependent variable
CAPX
Table 5
Investment decisions of subsidiaries by listing statuses of parent rms
294
19
)4.729 (0.769)***
390
0.083 (0.070)
0.398 (0.104)***
0.110 (0.074)
)0.058 (0.054)
0.009 (0.019)
0.057 (0.049)
0.307 (0.035)***
)0.006 (0.027)
)0.073 (0.104)
)0.053 (0.261)
429
Log(DISP)
Log(1 + ANALYST)
0.084 (0.026)***
389
0.001 (0.006)
0.003 (0.009)
0.004 (0.006)
)0.001 (0.005)
)0.001 (0.002)
)0.013 (0.004)***
)0.004 (0.003)
0.007 (0.002)***
0.014 (0.009)
EPREM
(3)
0.001 (0.005)
0.020 (0.008)**
0.002 (0.006)
)0.003 (0.004)
)0.003 (0.002)
)0.014 (0.004)***
0.003 (0.003)
0.004 (0.002)**
0.004 (0.008)
)0.013 (0.004)***
0.016 (0.002)***
0.178 (0.025)***
360
EPREM
(4)
The dependent variable is one of the analyst coverage (ANALYST), dispersion of analysts EPS forecasts (DISP) and implied equity premium (EPREM) in
year +1, as dened in Table 2. We take natural logarithm for ANALYST and DISP to reduce the skewness of their distributions. Other variables are dened
in Table 2. To address the concern of selection bias, we take a two-stage approach to estimate our model. In the rst stage, we run a probit model for the
existence of analysts forecasts by regressing the indicator for analyst coverage on the natural logarithm of market capitalization at the end of year 0 together
with a set of dummy variables for stock exchanges. From the rst-stage result, we calculate the inverse Mills ratio and put it in the second-stage OLS regression to correct for the potential estimation bias of OLS estimation. The table reports the results from the second-stage regressions. We report heteroscedacity-consistent standard errors in parentheses. ***Signicant at the 1 per cent level. **Signicant at the 5 per cent level.
Initial return
Percentage of subsidiary sold
Percentage of secondary shares sold
Hi-tech dummy
Underwriter ranking
Dummy for listed parent (PUBLIC)
Log (rm size) in scal year 0
Book-to-market ratio of equity in scal year 0
Leverage ratio (LEVER) in scal year 0
Log(1 + ANALYST) in year +1
Log(DISP) in year +1
Constant
Number of valid observations
(2)
(1)
Table 6
The determinants of post-oering subsidiary analyst coverage, forecast dispersion and implied cost of equity
296
Our correlation analysis (Table 3) shows that analyst coverage, rm size and underwriter reputation are highly correlated, which may lead to multicollinearity problem in
regression. In a robustness check, we exclude rm size and underwriter reputation from
column 4 and the key nding is robust to the alternative model specication.
2012 The Author
Accounting and Finance 2012 AFAANZ
297
outs cost of equity. To reconcile our nding here with those in Tables 4 and 5,
we argue that our estimated cost of equity reects only the cost of equity nancing but not the overall cost of nancing. Compared with technological rms,
non-technological rms can raise debt relatively easily because their collateral
values are higher. Therefore, an increase in cost of equity has a smaller impact
on the investments of technological rms.
7. Conclusions
This study examines the impact of aliation with listed parents on the nancial
constraint of carved-out units, using a sample of equity carve-outs between 1980
and 2006. Consistent with our prediction, listed rms carve-outs have lower
investment-cash-ow sensitivity than unlisted rms carve-outs, especially when
they are technological companies. We suggest that technological rms are more
likely to be nancially constrained than non-technological rms, because technological rms generally have more investment opportunities but are less protable
at the early stage of their life cycles, and they are prone to contractual frictions that
limit their ability to raise external funds, especially from equity nancing.
To test if a listed parents subsidiary enjoys a lower cost of equity than does an
unlisted parents one because it is more transparent, we compare analyst coverage, dispersion of analysts forecasts and implied cost of equity between listed
rms and unlisted rms carve-outs. Although the result shows that the former
group has a lower cost of equity than the latter, the dierence is not driven by a
dierence in corporate transparency. In a regression analysis, the eect of parents listing status on subsidiarys cost of equity survives after controlling for risk
and corporate transparency. Therefore, we infer that listed rms carve-outs are
less nancially constrained because of stronger nancial supports from parents.
The results from our study highlight the importance of parent rms listing statuses on group rms investment decisions and cost of nancing. Previous studies
show that having a closer banking relationship or belonging to a conglomerate
can alleviate a rms nancial constraint. This study brings the literature a step
forward by showing that listed parents are more capable of helping their subsidiaries than unlisted parents.
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