Value creation from financing in equity carve-outs: Evidence from Japan

This study examines whether and how Japanese carve-outs enhance the wealth of their parent companies' shareholders. In considering the differences between U.S. and Japanese carve-outs, this paper focuses on financing opportunities in carve-outs and tests the parent financing hypothesis and the subsidiary financing hypothesis. Through empirical analysis, this paper finds that the stock of a parent company reacts positively to a carve-out, and it especially reacts positively when the parent company is highly leveraged. In addition, parent companies apparently use funds from carveouts to lower their leverage and continue to lower their leverage after carve-outs. Thus, the stock market may regard carve-outs as a trigger to reduce a parent company's leverage. (C) 2013 Elsevier Inc. All rights reserved.