Equity Carveouts, Agency Costs, and Firm Value

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Equity Carveouts (ECOs), the initial public offering of shares in a subsidiary of a group of companies, are a relatively frequent phenomenon on the German capital market. The success of such prominent transactions as the carveout of Infineon or T-Online has been controversially discussed in both practice and academia. Lukas Junker examines if ECOs lead to a sustainable, long-term increase in firm value. His analysis is based on an agency perspective and ECOs are understood as an instrument of financing and reorganization that leads to a reconfiguration of the incentive structure in the groups of companies. In contrast to the dominantly positive assessment, results show that on the German capital market and on a long-term basis ECOs are associated with a deterioration of firm value. This can be mainly explained by a lack of independence of the subsidiary in the typical transaction: The reorganization is not beneficial, since most subsidiaries effectively remain part of the groups of companies with the holding company retaining a majority interest.