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An Examination of the Impact of Filings on Carve-out Parent Returns.

I. Introduction

Since pure initial public offerings (IPOs) do not trade until the ex-date, equity carve-outs (partial IPOs) provide an opportunity to track the impact of initial and subsequent filings on parent company returns throughout the filing process from initial filing to first trade date. (1) Although prior studies focus on ex-post determinants of equity carve-out and IPO returns, our study is the first to explore filing date returns as ex-ante predictors of equity carve-out returns. We investigate the extent to which carve-out (partial IPO) underpricing can be predicted based on public information available before the initial filing, first price range and offer dates. We use a sample of 289 carve-outs and their parents during the period 1988-2015. The implications are that models with public information lessen the need for models that rely on information asymmetry.

Loughran and Ritter (2002), Bradley and Jordan (2002) and Thompson (2010) examine parent company returns prior to and including carve-out ex-dates. Our specific contribution of this study is that we examine the impact of carve-out filings and subsequent pre-carve-out returns on carve-out parent returns during the carve-out filing process. Extending the filing range adjustment literature begun by Ritter (1991), Bradley and Jordan (2002) examine changes in IPO filing ranges from the initial filing to the final filing and to the offering price. We add equity carve-outs and find that the filing range adjustments are highly significant for carve-out parent ex-date returns. Also, we report significant influence of initial filing, first price range returns on subsequent returns. In addition, to preclude possible model misspecification, we test many variables found in previous carve-out and IPO studies. Also, we show that 4-27 percent of the variation of initial filing, first price range filing and ex-date market-adjusted carve-out parent returns is influenced by public information known prior to the offer date. We conclude that filing returns prior to the carve-out ex-date can influence subsequent filing and ex-date returns. Also, we show that several variables available prior to an equity carve-out can predict carve-out parent market-adjusted returns.

II. Background

A. Carve-outs

Equity carve-outs are partial IPOs in which parents sell no more than two-thirds of their ownership in wholly owned subsidiaries. U.S. companies have used equity carve-outs, partial IPOs as a reorganization tool for some time to unlock subsidiary values and to increase the parent's corporate focus or to create a pure play for the subsidiary. Generally, the offering proceeds are reinvested in the carve-out or are paid to the parent as debt reduction or as a special dividend. (2) We follow Schipper and Smith (1986) and Vijh (1999, 2002) and maintain that carve-outs are partial IPOs and that spin-offs are complete distributions similar to stock dividends.

In many cases parents receive debt repayments or dividends as part of the carve-out proceeds (Allen and McConnell 1998 and Madura and Nixon 2002). Also, parents use carve-outs to showcase their subsidiaries to prospective buyers (Klein, Rosenfeld and Beranek 1991). Parents can benefit from the low percentage of secondary shares for carve-outs since insiders prefer to hold the shares to be divested later and then reap the potential market price increases (Leland and Pyle 1977 and Loughran and Ritter 2002). This creates an overhang of future share sales.

Carve-outs imply lower risk than typical IPOs due to larger offering size (Vijh 1999) and reduced information asymmetry because the former subsidiaries are reported as part of existing firms (Schipper and Smith 1986). In the carve-out announcement period, Hulbert, Miles and Woolridge (2002) and Vijh (2002) report that pure carve-outs have lower parent company announcement period returns and lower subsidiary initial period returns than IPOs. In the carve-out announcement period, Vijh (2002) reports that pure carve-outs have lower parent company announcement period returns and lower subsidiary initial period returns than IPOs.

Schipper and Smith (1986) report that carve-out parents benefit from carve-outs in several ways. First, the parents benefit from increased returns during the pre-offering carve-out period. Next, since only offered shares are underpriced, parents can benefit from their ownership of unissued subsidiary shares. Also, parent shareholders benefit from the increased returns due to increased corporate focus.

The carve-out phase generates cash that can be used to retire debt, increase cash for investment or cash-out insiders. In addition, the carve-out phase creates a market for the new subsidiary's stock prior to a spin-off or other second divestiture and provides more corporate information from additional analyst coverage (Schipper and Smith 1986). Also, carve-outs allow parents to showcase their subsidiaries to prospective buyers (Klein, Rosenfeld and Beranek 1991). The tow percentage of secondary shares for carve-outs reflects that insiders prefer to hold the shares to be spun-off (or otherwise divested) and then benefit from the potential market price increases (Leland and Pyle 1977 and Loughran and Ritter 2002). This creates an overhang of future share sales.

Given the continued partial parent ownership and the implied lower risk, carve-outs can have different results from those found for regular IPOs (Thompson 2011). Reflecting the implied safety as a subsidiary and with larger offering sizes, equity carve-outs should have lower initial returns than pure IPOs. As partial IPOs, market prices do not exist for carve-outs during the filing process. Parent market prices reflect information on the combined firms' value prior to carve-out offerings (Prezas, Tarimcilar and Vasudevan 2000). Thus, other things equal and since carve-outs do not trade until after going public, parent returns can be affected by carve-out filings, such as the initial filing and the follow-on adjustments to include the first price range filing. The initial filing is usually an S-1 report that establishes the filing fee with an estimated offering size. Later, as an amended S-1 and as an indication of investor interest, the first price range is announced. (3) We examine the returns from the initial filing to the final price range. Partial price adjustments (shown below) reflect subsequent changes in the price range filings. Parent prices after carve-outs reflect reduced ownership in subsidiaries. Also, given the continued partial parent ownership and the implied lower risk, subsidiary filings can impact parent company returns. We examine specific hypotheses for carve-outs below.

B. Partial Price Adjustment Hypothesis

Hanley (1993) notes that the initial prospectus expected price range must reflect a "bona fide estimate" of the final offering price per SEC Regulation S-K (17 Code of Federal Regulations Section 229) and that this range depicts the lowest acceptable price from the issuer and the highest offering price that the investment banker predicts will clear the market. Hanley supports the Benveniste and Spindt (1989) hypothesis that due to a partial adjustment of offering prices, IPO offering prices that are above the initial filing price range add to underpricing. Since this range should be the best credible offer for the issuer, prices within this range demonstrate that all information is reflected in the offering price. Also, if offering prices are within the initial filing range, there should be low underpricing.

However, if there is an excess pre-offering demand, investment bankers can amend the filing and increase the price range. This creates a challenge for the investment bankers. To maintain the underwriter's reputation and to sell all offering shares, the price must be high enough to meet increased demand and to appease the issuer but low enough to encourage buyers with a potential price increase. This partial adjustment creates underpricing as the issuer leaves money on the table. Bradley and Jordan (2002) expand the partial price adjustment analysis to include changes in filing range from initial filing through final filing to the offer price. Extending the Hanley (1993) study, Bradley and Jordan (2002) and Loughran and Ritter (2002) show that the timing of the increase or decrease of the filing range influences the underpricing. The Bradley and Jordan (2002) measures for increases and decreases of initial filing ranges are UP1 and DW1. UP1 (DW1) is the percentage difference between the original midrange file price and the amended midrange file price for those companies that amend their file range up (down), 0 otherwise. The variables are defined as:

UP1 = max [0, (midpoint amended - midpoint original) / midpoint original] * 100 percent and (1)

DW1 = min [0, (midpoint amended - midpoint original) / midpoint original] * 100 percent (2)

where amended and original reflect the original and final amended file ranges. These two variables allow for the possibility of an asymmetric effect from file range increases or decreases.

Next, two variables capture possible asymmetric effects between the final file range and the final offering price. UP2 (DW2) is the percentage difference between the final offer price and the midrange file price for the companies that have offer prices above (below) the amended midrange file price, 0 otherwise.

C. Managerial Discretion Hypothesis

Allen and McConnell (1998), in their managerial discretion hypothesis, propose that corporations initiate carve-outs due to their high levels of leverage or operational troubles and find that stock returns increase with the percentage of issuer proceeds paid to creditors and decrease with the percentage retained by the issuer. Madura and Nixon (2002) report that since financially distressed parents received the vast majority of the issuer's proceeds used to retire debt or to pay dividends, parent announcement returns increase due to the perceived lower risk from reduced leverage. Thus, stock returns for carve-outs that use the funds to reduce debt or pay dividends to shareholders have higher returns than companies that retain the funds. Indicating the percentage of offering proceeds used to pay down debt or to pay a dividend, a positive (negative) DEBT coefficient indicates support (rejection) of the managerial discretion hypothesis.

With a contrary position, Mikkelson and Partch (1986) offer that returns vary with the percentage of the offering retained by the issuer. The USE coefficient indicates the proportion of proceeds reinvested by the issuer. Mikkelson and Partch (1986) report that IPO returns vary with the percentage of offering funds used by issuing firms. Also, Schipper and Smith (1986) offer that companies that use carve-out funds for positive net present value projects can have high returns. Thus, the USE parameters that vary with (inversely with) returns indicate contradiction (support) for the managerial discretion hypothesis. (4)

D. Filing Returns Influence on Subsequent Returns

Our main hypothesis is: Do filing returns influence subsequent returns? The initial filing return, first price range return and ex-date returns reflect the impact of variables, such as the partial price adjustment (UP1 and UP2), managerial discretion hypothesis (DEBT and USE) and others. In effect, this hypothesis encompasses a series of event studies using prior returns, such as filing date and first price range returns, as independent variables. The testable implication of this hypothesis is that if filing returns are significant variables for subsequent returns, they must influence these returns. Thus, the filing return parameters that vary with subsequent returns indicate support for the filing return hypothesis.

III. Sample Selection and Data

To be included in this study, a carve-out and parent must meet three initial criteria. First, we adopt Mergers and Acquisition Magazine's definition of a carve-out that the parent must retain one-third or more ownership in the subsidiary after the carve-out. For the 1990 and prior period, we examine new releases for initial public offerings of subsidiaries. From 1990 to 2006, Mergers and Acquisition Magazine provides a list of carve-outs each year. Thereafter, we use the SDC Platinum Global New Issues Database to screen for equity carve-outs. From these sources and after adjusting for divestiture IPOs, real estate investment trusts, master limited partnerships and exchange trade funds, there are 375 carve-outs with an offering price of $5 or better from 1988 to 2015. Second, to preclude the confounding effects of joint ownership, we eliminate 30 subsidiaries with more than one parent. Third, we eliminate 56 private or foreign parents that did not trade on the NYSE, Amex or Nasdaq (over-the-counter). This provides a sample of 289 carve-outs.

We cross check all carve-outs with Lexis-Nexis, the Investment Dealer's Digest, Standard and Poor's Dividend Record, Mergent Dividend Record (formerly Moody's), Mergent Industrial Manual (formerly Moody's) and the Dow Jones News Service. Compustat and Mergent provide operating data, including book values of equity and return on assets. SEC filings and news articles provide additional information for the sample.

Using the market-adjusted return method, we examine three sets of carve-out parent returns. Following Allen and McConnell (1998) and Hulbert, Miles and Woolridge (2002), we measure initial filing period and first price range cumulative abnormal returns over the three-day period centered on the initial filing and first price range date, respectively. Next, parent company ex-date stock returns are holding period returns from the day prior. Thomson Datastream and the Center for Research in Security Prices (CRSP) provide stock return data. Similar to Ritter (1991), Vijh (2002) and Hulbert, Miles and Woolridge (2002), we subtract CRSP equal-weighted index results (to include distributions) from carve-outs stock returns to obtain market-adjusted returns. (5) Loughran and Ritter (2004) provides investment banker reputation rankings.

IV. Empirical Analysis and Initial Results

A. Summary Statistics

Table 1 provides summary statistics. Panel A shows the number of carve-outs by carve-out year, the fraction of the subsidiary's ownership retained by the parent and mean and median offering proceeds. For the 289 carve-outs and parent companies from 1988 to 2015, subsidiary ownership retained ranges from 34 to 99 percent, with a mean of 74 percent and a median of 80 percent. This is similar to the Allen and McConnell (1998) mean (median) of 69 percent (80 percent) and the Vijh (2002) median of 71.9 percent.

The mean and median gross offering proceeds for this study are $351.91 million and $96.75 million, respectively. Pure IPOs for a similar period have a mean offering size of $123.34 million (Ritter 2016). With a mean carve-out offering size almost three times greater than the average IPO, it is no surprise that many carve-outs, such as Travelers Property and Casualty ($3,885 billion) and Kraft Foods ($8,680 billion), have set records for offering size. Since several carve-outs are the largest IPOs, there can be an upward limit on the amount that can be sold in an offering. Given that approximately 20 to 25 percent of the shares of subsidiaries are sold in the carve-out offering, the market capitalization of these partial IPOs can be four or five times the offering size. Thus, the percentage of the offering retained by parents is an important variable.

Panel B provides three calendar day periods: between the initial filing (Form S-1) to the first filing range adjustment, from the first filing range adjustment to the final filing range adjustment before the pricing and from the final adjustment to the offering price. The periods precede the subsidiary's trading in the secondary market (Bradley and Jordan 2002). We observe that the average timeframe from the initial filing to the first filing range adjustment is 28.71 days. The period from the first price range to the first filing range adjustment (UP1 or DW1) averages 18.59 days. However, the zero medians for both timeframes indicate that most firms provide a pricing range with the initial or final filing. Since the expected price range must reflect a bona fide estimate of the final offering price, many offerings must change their price ranges either up or down. The mean (median) period from the last filing range adjustment to the offering price is 39.14 (29) days. Thus, the filing range adjustments occur approximately 30 days prior to the official offering price (shown on SEC Form 424B) and the subsequent trading in the secondary market.

B. Single Variable Regressions

Table 2 reports the single variable regressions of the parent company carve-out first filing (Table 2, column 1), first price range (Table 2, column 2), parent ex-date (Table 2, column 3) and subsidiary ex-date (Table 2, column 4) market-adjusted returns against several variables that can influence stock returns for stockholders. The variables detailed below are statistically significant and maintain their expected coefficient sign. From these variables, we construct our cross-sectional tests for stock return multiple regressions. (6)

8.7. Relative Size

Vijh (1999) observes that market capitalization of the parent is inversely related to the risk of the carve-out. The relatively large initial offering cash inflows result in market valuations of retained insider holdings from one-third to four times the offerings' values. To capture the impact of the change in collateral on stock and bond returns, we use the ratio of the carve-out's offering size to the parent's pre- carve-out company market value of equity. Although Asquith and Mullins (1986) report that changes in capital structure and offering size cause wealth loss in IPOs, the relative size variable could be positively related to stock returns and reflect the wealth increase noted by Mulherin and Boone (2000). The positive relative size variable is significant at the 1 percent level for the parent company initial filing returns. These results are similar to Mulherin and Boone (2000) and Vijh (2002), who report that wealth increases with the relative size of carve-outs to their parents. The announcement carve-out stock returns increase with the proportion of the offering size to the parent company market value.

B.2. Multiple Carve-outs

Over 25 percent of the sample (73 companies) had parents that conducted multiple equity carve-outs. To capture possible effects of multiple carve-out, we use a dummy variable, where 1 equals multiple carve-outs, and 0 otherwise. The negative and 1 percent significant MULT coefficient for initial filing returns implies lower risk for investor of parents who conduct multiple carve-outs.

B.3. Investment Banker Reputation

Prestigious underwriters can help their clients successfully complete the process and maximize wealth. Carter and Manaster (1990) develop investment banker reputation rankings that are based on the underwriters' relative order on the prospectus (tombstone). We adapt the Loughran and Ritter (2004) revised investment banker reputation ratings that range from a low of 1.0 to a high of 9.1. These ratings account for penny stock IPOs that are avoided by prestigious investment bankers.

Welch (1985) finds that prestigious underwriters use their reputation capital to certify or signal high quality issues. Thus, returns should vary inversely with investment banker reputation. However, Beatty and Welch (1996) show that underwriter reputation varies inversely with returns before 1990 and with returns after 1990. They find that after 1990 for IPOs, investment bankers redeem (cash in) their reputation to take more risk and avoid the possibility of missing a hot IPO issue, such as another Microsoft. For first price range returns (Table 2, column 2) and parent ex-date returns (Table 2, column 3), the investment banker reputation parameter varies inversely with first price and ex-date returns. This indicates that underwriters have retained their reputation for carve-outs.

B.4. Partial Price Adjustment

Consistent with the partial price adjustment hypothesis mentioned in Section 2.2, the positive UP1 coefficient is marginally significant for first price returns (Table 2, column 2). The positive UP2 parameter is 5 percent significant for subsidiary ex-date returns (Table 2, column 4).

These results are consistent with Bradley and Jordan (2002) for IPOs and with Thompson (2010) for equity carve-outs.

B.5. Proportion of Proceeds Reinvested by the Subsidiary

Mikkelson and Partch (1986) report that common stock values increase with announcements of capital spending. However, the negative and 1 percent significant USE coefficient contradicts Mikkelson and Partch (1986) and supports Allen and McConnell (1998) shown below.

B.6. Proportion of Proceeds Used for Debt Reduction

Allen and McConnell (1998), in their managerial discretion hypothesis, observe that carve-out returns vary with the proportion of proceeds used to retire subsidiary debt or to pay dividends from the total offering proceeds (DEBT). For parent ex-date returns (Table 2, column 3) the sample's positive DEBT coefficients are significant at the 1 percent level. This result indicates that parent company market-adjusted returns increase with the percentage of subsidiary offering proceeds used to pay down debt or to pay dividends.

B.7. Market Volatility

The CBOE Volatility Index (Volatility) provides the implied volatility of S&P 100 Index options. The Volatility Index predicts future index returns and represents market ebullience and the potential for future public offerings. A high (low) Volatility coefficient indicates high (low) levels for public offerings. These results support Dennis, Mayhew and Stivers (2006), who show that the S&P 100 Index options and the CBOE Volatility Index can predict stock returns. Reflecting lower risk, the Volatility parameter is significant at the 1 percent level and is negative for parent carve-out ex-date returns (Table 2, column 3).

B.8. Time from Initial Filing to First Price Range

We introduce a variable that captures the time from the first filing date to the first price range date expressed as a fraction of a 365-day year (DFPY). We observe that the positive DFPY parameter is marginally significant (10 percent) for carve-out subsidiary ex-date returns. This implies that the greater the period from the first filing to the first price range amended filing, the greater the carve-out ex-date return.

B.9. Leverage

We examine leverage, long-term debt/parent pre-carve-out market capitalization (LEV). Schipper and Smith (1986) observe that indicating higher risk returns vary with leverage. Reflecting this higher risk, the positive LEV coefficient is 1 percent significant for initial filing period returns (Table 2, column 1).

B.10. Return on Assets

Distressed parents can receive carve-out proceeds from dividends or debt repayments (Madura and Nixon 2002 and Thompson 2011). We use return on assets (ROA) for the year prior to the carve-out to indicate distressed companies. Returns from distressed companies vary inversely with ROA (Madura and Nixon 2002 and Thompson 2011). We observe that the ROA coefficient is significant at the 5 percent level for the filing period (Table 2, column 1), parent ex-date (Table 2, column 3) and subsidiary ex-date (Table 2, column 4) returns. Indicating distressed parents, the ROA parameter is negative for the positive filing date returns (Table 2, column 1). This inverse relation continues between the positive ROA coefficient and negative parent ex-date returns (Table 2, column 3). To compensate for the loss of subsidiary value, carve-out parent ex-date returns generally vary inversely with subsidiary ex-date returns (Schipper and Smith 1986). Thus, the ROA parameter increases for subsidiary ex-date returns (Table 2, column 4) versus the inverse relation between parent ex-date returns and ROA.

C. Correlation Matrix

Prior to performing our multiple regression analysis, we use the variance inflation factor (VIF) to check our significant variables for multicollinearity. Table 3 provides a correlation matrix of the remaining significant variables discussed in Section 4.B.

Parent company returns are reported in Table 3 as initial filing (FDR), first price range (FPR) and ex-date (PER). Subsidiary ex-date returns are indicated SER. Independent variables are: ratio of carve-out offering size to parent market cap (SIZR), fraction of offering proceeds reinvested by subsidiary (USE), fraction of proceeds paid as dividend or debt reduction (DEBT), investment banker reputation (IBR), S&P 100 volatility index (VOL), ratio of mid-point of adjusted filing range to midpoint of initial filing range where UP1 is positive (UP1), ratio of offering price to mid-point of final filing range where UP2 is positive (UP2), fraction of year from initial filing to first price range (DFPY), dummy variable for parents with multiple carve-outs (MULT), ratio of long-term debt to parent market capitalization (LEV), and return on assets (ROA).

Initially, we provide correlations between dependent variables and independent variables. These reflect the relationships outlined in Table 2 and discussed in Section 4.B. FDR is positively correlated with SIZR and LEV at the 5 percent and 1 percent levels, respectively. FDR is negatively correlated with MULT and ROA at the 1 percent and 5 percent levels, respectively. FPR is positively correlated with UP2 and UP1 at the 5 percent and 1 percent levels, respectively, and is negatively correlated with IBR at the 10 percent level. PER is positively correlated with FPR, SER, DEBT, IBR and ROA at the 10 percent, 5 percent, 1 percent and 5 percent levels, respectively. PER is negatively correlated with USE and VOL at the 1 percent level. SER is positively correlated with UP2, DFPY and ROA at the 5 percent, 10 percent and 5 percent levels, respectively.

The cross correlations mentioned below are not discussed with the dependent variable relationships in Section 4.B. Also, no cross correlation had to be eliminated for multicollinearity in the variation inflation factor (VIF) process. Marginally significant, SIZR is positively correlated with DEBT and negatively correlation with UP2. Indicating higher risk, lower IBR and shorter DFPY, USE is negatively correlated with DEBT, IBR and DFPY at the 1 percent, 5 percent and 5 percent levels, respectively, but is positively correlated with VOL at the 10 percent level. Reflecting the negative correlation between DEBT and USE, DEBT is positively correlated with IBR and DFPY at the 1 percent and 10 percent levels, respectively. Indicating higher returns with VOL and UP1 and low risk for ROA and LEV, IBR is positively correlated with VOL, UP1, UP2, DFPY and ROA at the 5 percent, 10 percent, 10 percent, 1 percent and 10 percent levels, respectively, but is negatively correlated with LEV at the 1 percent level. Reflecting increasing risk and returns, VOL is positively correlated with UP1, UP2, DFPY and ROA at the 10 percent, 5 percent, 1 percent and 5 percent levels, respectively. On a marginally significant basis, UP1 is positively correlated with ROA. Indicating low risk, UP2 is negatively correlated with LEV at the 1 percent level and positively with ROA at the 5 percent level. Reflecting shorter periods from initial filing to first price range for companies with multiple parents, DFPY is negatively correlated with MULT at the 5 percent level.

V. Multiple Regression Analysis

Since we have three parent and one subsidiary dependent variables, we report four distinct multiple regressions. Because we exclude variables for which information is not available before the reported return, each regression will have its unique set of independent variables that are available prior to the date of the dependent variable. (7) We apply the Akaike Information Criterion (AIC) to the remaining significant variables from the single variable analysis (Section 4) to obtain the optimal variables for the multiple regressions. This provides four parsimonious models with parent filing date, first price range, ex-date returns and subsidiary ex-date returns. Similar to the adjusted R2, the AIC provides a tradeoff between maximizing explained variation and limiting an increase in the number of independent variables. Thereafter, we use these variables to examine the significance of coefficients over the three parent models: first filing returns (Section 5.A), first price returns (Section 5.B), carve-out parent ex-date returns (Section 5.C) and carve-out subsidiary ex-date returns (Section 5.D). Similar to Neuhauser and Thompson (2014) and to control for possible industry or year influence, we examine four models for each section: base model (column 1), base plus industry dummy variables (column 2), base plus year dummies (column 3) and base plus industry and year dummies (column 4).

A. Filing Date Multiple Regressions

Table 4 provides the carve-out parent filing date multiple regression results for the period from 1988 to 2016. We regress filing date returns against four independent variables and control variables for industry and year as follows:

FDR = [b.sub.1]Size ratio + [b.sub.2]MULT + [b.sub.3]LEV + [b.sub.4]ROA +[b.sub.5]lndustry +[b.sub.6]Year (3)

where FDR is filing date return; MULT is a dummy variable for multiple carve-outs where 1 equals multiple, and 0 otherwise; LEV is the ratio of total debt to parent company market capitalization; ROA is parent company return on assets; and b's are coefficients.

The F-values are significant at the 1 percent level for all filing period models. Also, based on adjusted R-squared, the models explain 7.09 to 28.73 percent of the variation in filing date returns. The positive size ratio coefficients are significant at the 5 percent level or better for all four models. Consistent with Mulherin and Boone (2000) and the single variable results (Section 4.B), this indicates that the larger the carve-out size relative to the parent pre-carve-out market capitalization, the greater the parent company returns. The negative MULT parameter is significant at the 5 percent level or better for the base model (Table 4, column 1) and the base plus industry model (Table 4, column 2). Indicating distressed parents, the negative ROA coefficient is significant at the 5 percent level for the base (Table 4, column 1) and marginally significant for the base plus industry model (Table 4, column 2).

B. First Price Date Multiple Regressions

Table 5 reports carve-out returns for the first price range for the 1988-2015 period. Similar to Table 4, we use four models. We regress filing date returns against three independent variables and control variables for Industry and Year as follows:

FPR = [b.sub.1]BR + [b.sub.2]UP1 + [b.sub.3]FDR + [b.sub.4]Industry + [b.sub.5]Year (4)

where FPR is first price return, IBR is investment banker reputation ranking, UP1 is the ratio of the mid-point of the adjusted filing range to the initial filing range where UP1 is positive, FDR is filing date return, Industry and Year are control variables and b's are coefficients.

All four F-values are significant at the 1 percent level. Based on adjusted R-squared, the models explain from 18.82 to 24.86 percent of the first price range returns. Similar to the single regressions, the filing return coefficients are 1 percent significant for all models. This indicates that filing returns can influence first price returns.

C. Parent Ex-date Multiple Regressions

Table 6 provides results for parent carve-out ex-date returns for the 1988-2015 period.

Similar to Tables 4 and 5, we use four models to evaluate returns. We regress filing date returns against five independent variables and control variables for industry and year as follows:

PER = [b.sub.1]DEBT + [b.sub.2]IBR + [b.sub.3]VOL + [b.sub.4]ROA + [b.sub.5]FPR + [b.sub.6] Industry + [b.sub.7]Year (5)

where DEBT is the percentage of the offering used to retire debt or to pay dividends, IBR is investment banker reputation ranking, VOL is the S&P 100 volatility index, ROA is return on assets, FPR is first price return, Industry and Year are control variables and b's are coefficients.

F-values for the base, base plus year dummies and base plus industry dummies models are significant at the 1 percent level. Based on adjusted R-squared, the coefficients explain from 8.40 to 10.09 percent of the carve-out parent ex-date returns. The positive DEBT, ROA, first price return and negative volatility coefficients are significant at the 5 percent level or better for all four models. Consistent with Allen and McConnell (1998), the positive DEBT parameters indicate that parent returns increase with the proportion of offering proceeds paid as dividends or to reduce debt. The inverse relation between the ROA parameter and parent ex-date returns reflects distressed carve-out parents. The negative volatility parameters indicate low risk for ex-date returns. The positive IBR coefficient is significant at the 5 percent level for the base plus industry model (Table 6, column 2) and base plus industry and year model (Table 6, column 4) and marginally significant for the base (Table 6, column 1) and base plus year (Table 6, column 3) models. Similar to the single regression results, the IBR coefficients are inversely related to ex-date returns and indicate that investment bankers have retained their reputation.

D. Subsidiary Ex-date Multiple Regressions

Table 7 provides results for subsidiary carve-out ex-date returns for the 1988-2015 period. Similar to Tables 4, 5 and 6, we use four models to evaluate returns. We regress filing date returns against three independent variables and control variables for industry and year as follows:

[mathematical expression not reproducible in ascii] (6)

where SER is subsidiary ex-date return, UP2 is ratio of the offering price to the midpoint of the final filing price where UP2 is positive, DPFY is the fraction of the year from initial filing to first price range, ROA is return on assets, Industry and Year are control variables and b's are coefficients.

F-values for the base model are significant at the 1 percent level. Based on adjusted R-squared, the coefficients explain from -3.19 to 3.8 percent of the subsidiary carve-out ex-date returns. Reflecting the influence of the partial price adjustment, the positive UP2 parameter is significant at the 5 percent level for all four models. Consistent with the single variable results (Table 2, column 4), the ROA coefficient is significant at the 5 percent level or better for the base (Table 7, column 1), base plus year (Table 7, column 3) and base plus industry and year (Table 7, column 4), but marginally significant for the base plus industry model (Table 7, column 2). Also, similar to the single period results, the positive DPFY parameter is marginally significant for the base model (Table 7, column 1). Although there are no significant industry or year variables, the subsidiary multivariate models' explanatory power wanes when we control for industry or year dummy variables.

E. Robustness Tests

We perform four robustness tests for carve-out parent and carve-out subsidiary ex-date returns. First, we contrast results for companies with multiple versus single carve-outs. Second, we compare parent companies with high versus low leverage. We use the sample median leverage (0.2064) as the break point. Third, we test for distressed companies with negative ROA that may receive carve-out proceeds from debt or dividends from their subsidiaries. Finally, we contrast results for firms with high returns versus low first price returns. Similar to our leverage test, we use the sample median (0.0017) to compare high and low first price returns.

E.7. Robustness Test for Carve-out Parent Ex-date Returns

Table 8 provides robustness tests of OLS regression results for parent stock ex-date returns for the period January!, 1988 to December 31, 2015. We contrast returns over four sets of variables: multiple vs. single carve-outs (Panel A, columns 1 and 2, respectively), high vs. low leverage (Panel A, columns 3 and 4, respectively), positive vs. negative ROA (Panel B, columns 1 and 2, respectively) and high vs. low first price returns (Panel B, columns 3 and 4, respectively). We adjust daily stock returns by subtracting the contemporaneous returns for the CRSP equal-weighted index (including distributions). The market-adjusted returns are regressed on several independent variables: the Loughran and Ritter (2002) investment banker reputation variable, a range from 1.0 to 9.1 (IBR); the CBOE Volatility Index (Volatility); the percentage of the offering reinvested by the subsidiary (USE); the percentage of offering proceeds used for debt reduction or to pay dividends (DEBT); leverage, long-term debt/parent market capitalization (LEV); return on assets (ROA) and the first price return.

Indicating lower risk for the 73 multiple carve-out companies (Table 8, Panel A, column 1), the negative LEV coefficient is 1 percent significant. For multiple carve-out parents, the negative first price return parameter is marginally significant, but the coefficient is positive and 5 percent significant for single carve-out parents. The single carve-out results (Table 8, Panel B, column 2) dominate the total LEV results. The 216 single carve-out parents have positive IBR and DEBT coefficients and negative volatility and USE parameters significant at the 5 percent level or better. The positive IBR results indicate that investment bankers redeemed their reputation and contradict our earlier findings (Table 6). The positive DEBT and negative USE parameters support the managerial discretion hypothesis of Allen and McConnell (1998) observed in Table 6.

We contrast high and low leverage companies in Table 7, panel A, columns 3 and 4. For the 162 high leverage companies (Table 8, panel A, column 1), the negative volatility and USE parameters and positive DEBT coefficient are significant at the 5 percent level or better. For the 127 low leverage companies (Table 8, panel A, column 4), the negative volatility and positive LEV coefficients are significant at the 5 percent level. Confirming previous results, the negative volatility parameters indicate low risk. Also, the negative USE and positive DEBT coefficients confirm the managerial discretion hypothesis. Indicating that investment bankers redeemed their reputation, the positive and marginally significant IBR parameter contradicts the Table 6 finding. Also, the marginally significant and positive ROA coefficient confirms that parents are distressed.

The negative USE and positive DEBT parameters for the 226 positive ROA companies (Table 8, panel B, column 1) and the positive DEBT coefficients for the 63 negative ROA companies (Table 8, panel B, column 2) are 5 percent significant. The 146 high return companies (Table 8, panel B, column 3) have negative volatility coefficients significant at the 1 percent level and marginally significant positive DEBT parameters. Confirming the managerial discretion hypothesis, the 143 low return companies have 1 percent negative USE and positive DEBT coefficients and marginally significant negative volatility parameters.

E.2. Robustness Test for Carve-out Subsidiary Ex-date Returns

Table 9 provides robustness tests of OLS regression results for subsidiary stock ex-date returns for the period January 1, 1988 to December 31, 2015. We contrast returns over four sets of variables: multiple vs. single carve-outs (panel A, columns 1 and 2, respectively), high vs. low leverage (panel A, columns 3 and 4, respectively), positive vs. negative ROA (panel B, columns 1 and 2, respectively) and high vs. low first price returns (panel B, columns 3 and 4, respectively). We adjust daily stock returns by subtracting the contemporaneous returns for the CRSP equal-weighted index (including distributions). The market-adjusted returns are regressed on several independent variables: the percentage of offering proceeds used for debt reduction or to pay dividends (DEBT); return on assets (ROA); the ratio of the mid-point of the final filing price and the offering price where UP2 is positive, and 0 otherwise; and the fraction of year from the initial filing to first price range (DFPY). The 73 multiple carve-out companies (Table 9, panel A, column 1) have positive ROA and UP2 coefficients significant at the 5 percent level and marginally significant negative LEV and positive DFPY parameters. The 216 single carve-outs have positive and marginally significant ROA and UP2 parameters. Confirming the Table 7 results, the inverse relation between ROA and parent ex-date returns indicates distressed parents. The positive UP2 parameters support the partial price adjustment hypothesis.

For the 162 subsidiaries of high leverage parents, the positive and 1 percent significant UP2 and marginally significant DFPY coefficients (Table 9, panel A, column 3) indicate their positive relationship on ex-date returns. Reflecting distressed parents, the positive ROA parameter is 1 percent significant for the 127 subsidiaries of low leverage parents (Table 9, panel A, column 4). The subsidiaries of high leverage parents have positive returns and the subsidiaries of low leveraged parents have negative returns, but the high leverage companies dominate total results.

For the 226 subsidiaries of positive ROA parents (Table 9, panel B, column 1), the positive UP2 coefficient is marginally significant. The 63 subsidiaries of distressed parents (Table 9, panel B, column 2) have negative DEBT and positive UP2 coefficients significant at the 1 percent level. The positive DFPY parameter is marginally significant.

Also noted in Table 7, the positive UP2 parameters support the partial price adjustment hypothesis. However, the negative DEBT coefficient contradicts the managerial discretion hypothesis and supports Mikkelson and Partch (1986). Similar to the leverage results, the positive ROA returns are positive and the negative ROA returns are negative, but the positive returns dominate total mean results.

The 143 low first price return companies (Table 9, panel B, column 4) have positive and 1 percent significant ROA and UP2 coefficients. Similar to the leverage and ROA results, the returns reverse for the positive high price returns to negative low price range company returns.

VI. Conclusions and Implications

The implications of these results are that publicly available information known prior to the carve-out offering date can predict market-adjusted first price range returns and can explain 18-24 percent of the variation. This lessens the need for models that rely on information asymmetry.

Using a series of single variable regressions and multiple regressions, we find several variables to be significant predictors of carve-out market-adjusted initial returns. The ratio of the offering price to parent company market capitalization and the leverage variable (LEV) significantly predict carve-out first filing returns. In turn, first filing returns can influence first price range returns. Likewise, first price range returns can impact carve-out parent ex-date returns.

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Thomas Thompson

University of Texas-Arlington

(1) The initial filing date is the date of the initial carve-out prospectus. This prospectus usually has an offering value to set the filing fee but does not usually have a price range for the offering. We use the prospectus change date for the first price range and the final prospectus date for the offering price and first trade date as ex-date. For carve-out parent returns, we use three-day cumulative abnormal returns centered on the respective date. Since the subsidiary does not trade until the ex-date, we use market adjusted holding period returns from the offering price to first-day closing price for subsidiary ex-date returns.

(2) In some cases, the financial press incorrectly uses the term "spin-off" to include equity carve-outs. However, the finance literature defines spin-offs as pro-rata distributions of subsidiaries to parent shareholders (Schipper and Smith 1983 and Desai and Jain 1999). In spin-offs, no funds are transferred.

(3) Other filings can be F-1 for foreign companies and SB-T for small businesses.

(4) We examine the changing issuer objective function of Loughran and Ritter (2002) and Hogan and Olson (2002) and the overhang hypothesis of Bradley and Jordan (2002), but results are inconclusive.

(5) We achieve similar results for returns adjusted by the CRSP value-weighted index.

(6) We examine cross-industry carve-outs, leverage and log of offering size variables but find them to be statistically insignificant in the filing, first price range and event phases

(7) For example, filing rage parameters UP1, UP2, DW1 and DW2 are not available for the filing return but are available for subsequent returns. Similarly, we cannot use filing returns until the first price return and first price returns until the ex-date.
TABLE 1
Summary Statistics
This table reports the annual frequency of equity carve-outs during
the period 1988 through 2015. Panel A shows the mean and median
fraction of the subsidiary's outstanding shares retained by parent
firms following carve-outs and the mean and median gross proceeds
raised in the carve-out. Panel B shows the calendar days from initial
filing, the first and final price ranges and the offering price.

Panel A: Fraction of Subsidiary Shares Retained by Parents and
Carve-out Offering Proceeds

                      Fraction of Subsidiary's  Offering Proceeds
                      Shares Retained by
                      Parent                    ($Millions)
Carve-out  Number of  Mean    Median            Mean     Median
Year       firms

1988        12        0.76    0.80                86.32    35.50
1989         9        0.71    0.74               225.66    89.54
1990         7        0.75    0.80                79.21    59.71
1991        13        0.63    0.61                82.51    40.00
1992        18        0.67    0.71               144.71    77.65
1993        21        0.70    0.75               248.78    81.00
1994        24        0.66    0.66               115.69    69.30
1995        12        0.78    0.83               271.86    70.50
1996        39        0.74    0.81               250.58    83.52
1997        17        0.75    0.80               114.61    31.90
1998        16        0.75    0.70               621.17    87.50
1999        24        0.76    0.81               411.68    94.95
2000        24        0.80    0.82               449.29   163.90
2001         9        0.81    0.82              1693.74   420.00
2002         6        0.67    0.69               851.01   292.54
2003       ---        ---     ---               -----    -----
2004         8        0.72    0.80               702.99   129.19
2005         6        0.72    0.73               233.75   218.50
2006         6        0.81    0.83               355.55   344.12
2007         1        0.98    0.98               904.37   904.37
2008       ---        ---     ---               -----    -----
2009         3        0.72    0.71               647.81   684.00
2010         1        0.46    0.46               297.97   297.97
2011         2        0.83    0.83               178.09   178.09
2012         1        0.87    0.87               367.54   367.74
2013         5        0.79    0.81               562.94   165.80
2014         1        0.75    0.75              3010.00  3010.00
2015         2        0.92    0.92               537.50   537.50
Total      289        0.74    0.80               351.81    96.75

              Panel B: Timeframes for Filings (Calendar Days)
                               Mean   Median

Initial filing to first price  28.71   0
range
First price range to final     18.59   0
price range
Initial filing to offering     39.14  29
date

TABLE 2
Single Variable Analysis Filing, First Price Range, Parent Ex-date
and Subsidiary Ex-date Returns
This table shows two sets of dependent variables for the period from
January 1, 1988 to December 31, 2015. First, we use single variable
regressions of parent company three-day carve-out initial filing
period returns (centered on the announcement date) (column 1). Next,
we provide returns for the first price range (column 2), the parent
carve-out ex-date (column 3) and the subsidiary carve-out ex-date
(column 4). Daily stock returns are adjusted by subtracting the
contemporaneous returns for the CRSP equal-weighted index. The
market-adjusted returns are regressed separately on several
independent variables: the ratio of subsidiary offering to the parent
equity market capitalization (size ratio); the percentage of the
offering reinvested by the subsidiary (USE); the percentage of the
offering used to retire debt or to pay dividends (DEBT); the modified
Loughran and Ritter (2004) investment banker reputation variables that
range from 1.0 to 9.1(IBR); the CBOE Volatility Index (Volatility);
the ratio of the mid-point of the adjusted filing range to the initial
filing range where UP1 is positive, and 0 otherwise; the ratio of the
offering price to the mid-point of the final filing price where UP2 is
positive, and 0 otherwise; fraction of year from initial filing to
first price range (DFPY); a dummy variable where 1 equals multiple
carve-outs, and 0 otherwise (MULT); leverage, long-term debt/parent
market capitalization (LEV); return on assets (ROA); and filing and
first price returns for subsequent returns. There are 289 companies in
the sample, (t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01, 0.05 and 0.10
levels, respectively. NA = not applicable.

               (1)             (2)            (3)
Variable        Filing Return   First Price   Parent Ex-date
                                Return

Mean             0.0204          0.0139        -0.0176
(Median)        (0.0037)        (0.0017)      (-0.0128)
Size Ratio       0.0097          0.0011         0.0020
                (2.43) (**)     (0.32)         (0.64)
                 0.0044          0.0001        -0.0224
                (0.40)          (0.01)        (-2.70) (***)
                 0.0093          0.0035         0.0253
DEBT            (0.84)          (0.36)         (3.00) (***)
IBR             -0.0040         -0.0051         0.0040
               (-1.29)         (-1.86) (*)     (1.70) (*)
Volatility       0.0088          0.0439        -0.2144
                (0.11)          (0.61)        (-3.51) (***)
UP1             NA               0.0494        -0.0153
                                (1.68) (*)    (-0.60)
UP2             NA               NA             0.0635
                                               (1.55)
DFPY            NA              -0.0265         0.0122
                               (-0.88)         (0.47)
MULT            -0.0321         -0.0158        -0.0120
               (-3.01) (***)   (-1.65)        (-1.45)
LEV              0.0001          0.0000        -0.0000
                (2.63) (***)    (0.96)        (-0.32)
ROA             -0.1784         -0.0380         0.1297
               (-2.11) (**)    (-0.50)         (1.99) (**)
                                 0.4419         0.0018
Filing Return   NA              (9.69) (***)   (0.04)
First Price     NA               NA             0.0903
Return                                         (1.78) (*)

               (4)
Variable       Subsidiary Ex-date

Mean             0.0011
(Median)       (-0.0024)
Size Ratio      -0.0001
               (-0.03)
                -0.0041
               (-0.60)
                 0.0008
DEBT            (0.12)
IBR              0.0014
                (0.75)
Volatility       0.0336
                (0.67)
UP1             -0.0122
               (-0.60)
UP2              0.0840
                (2.57) (**)
DFPY             0.0357
                (1.71) (*)
MULT            -0.0001
                (0.00)
LEV             -0.0002
               (-0.26)
ROA              0.1212
                (2.32) (***)
                 0.0056
Filing Return   (0.15)
First Price     -0.0164
Return         (-0.40)

TABLE 3
Correlation Matrix
Prior to performing our multiple regression analysis, we use the
variance inflation factor (VIF) to check our significant variables for
multicollinearity. Pearson Correlation Coefficients top row.
Probability >|r| under Ho: Rho = 0 in parentheses. See text for
variable definitions.
(***), (**) and (*) indicate significance at the 0.01. 0.05 and 0.10
levels, respectively

      FDR           FPR          PER           SER          SIZR

FPR   -0.0234
      (0.69)
PER    0.0023        0.1045
      (0.97)        (0.08) (*)
SER    0.0091       -0.0236       0.1469
      (0.88)        (0.69)       (0.01) (**)
SIZR   0.1417        0.0186       0.0377       -0.0017
      (0.02) (**)   (0.75)       (0.52)        (0.97)
USE    0.0235        0.0006      -0.1572       -0.0357      -0.0713
      (0.69)        (0.99)       (0.01) (***)  (0.54)       (0.22)
DEBT   0.0493        0.0211       0.1744        0.0068       0.0984
      (0.40)        (0.72)       (0.00) (***)  (0.91)       (0.10) (*)
IBR   -0.0761       -0.1089       0.1001        0.0442      -0.0114
      (0.20)        (0.06) (*)   (0.09) (*)    (0.45)       (0.85)
VOL    0.0064        0.0359      -0.2028        0.0396      -0.0437
      (0.91)        (0.54)       (0.00) (***)  (0.50)       (0.46)
UP1    0.0737        0.0986      -0.0353       -0.0352      -0.0247
      (0.38)        (0.09) (*)   (0.55)        (0.55)       (0.68)
UP2    0.0520        0.1211       0.0909        0.1500      (0.07) (*)
      (0.38)        (0.04) (**)  (0.12)        (0.01) (**)  (0.07) (*)
DFPY   0.0248       -0.0518       0.0275        0.1006       0.0834
      (0.67)        (0.38)       (0.64)        (0.09) (*)   (0.16)
MULT  -0.1750       -0.0969      -0.0855       -0.0001      -0.0613
      (0.00) (***)  (0.10)       (0.15)        (1.00)       (0.30)
LEV    0.1535        0.0566      -0.0187        0.0569       0.0071
      (0.01) (***)  (0.34)       (0.75         (0.33)       (0.90)
ROA   -0.1233       -0.0295       0.1166        0.1359      -0.0518
      (0.04) (**)   (0.62)       (0.05) (**)   (0.02) (**)  (0.38)

       USE           DEBT         IBR           VOL           UP1

FPR
PER
SER
SIZR
USE
DEBT   -0.6812
       (0.01) (***)
IBR    -0.1404        0.1319
       (0.02) (**)   (0.02) (**)
VOL     0.1093       -0.0389       0.1336
       (0.06) (*)    (0.51)       (0.02) (**)
UP1     0.0655       -0.0408       0.1089        0.0984
       (0.27)        (0.49)       (0.06) (*)    (0.09) (*)
UP2     0.0759       -0.0525       0.1081        0.1223        0.0702
       (0.20)        (0.37)       (0.07) (*)    (0.04) (**)   (0.23)
DFPY   -0.1387        0.0976       0.2112        0.2164       -0.0073
       (0.02) (**)   (0.10) (*)   (0.00) (***)  (0.00) (***)  (0.90)
MULT    0.0303       -0.0677       0.0914       -0.0540        0.0448
       (0.61)        (0.25)       (0.12)        (0.36)        (0.45)
LEV     0.0531       -0.0694      -0.1541       -0.0189       -0.02944
       (0.37)        (0.24)       (0.01) (***)  (0.75)        (0.62)
ROA     0.0506       -0.0755       0.1139        0.1244        0.1086
       (0.39)        (0.20)       (0.05) (*)    (0.03) (**)   (0.07) (*)

       UP2           DFPY         MULT     DEV

FPR
PER
SER
SIZR
USE
DEBT
IBR
VOL
UP1
UP2
DFPY   -0.0226
       (0.70)
MULT    0.0278       -0.1170
       (0.64)        (0.05) (**)
LEV    -0.1514       -0.0029      -0.0620
       (0.01) (***)  (0.96)       (0.29)
ROA     0.1254       -0.0333      -0.0769  -0.0311
       (0.03) (**)   (0.57)       (0.19)   (0.60)

TABLE 4
Multiple Regression Results - Parent Filing Date Returns
This table reports OL5 regression results for parent carve-out filing
date returns for the period January 1, 1988 to December 31, 2015.
There are four models: base model (column 1). base model with industry
dummy variables (column 2), base model with year dummy variables
(column 3) and base model with industry and year dummy variables
(column 4). Daily stock returns are adjusted by subtracting the
contemporaneous returns for the CRSP equal-weighted index (including
distributions). The market-adjusted returns are regressed on several
independent variables: the ratio of subsidiary offering to the parent
equity market capitalization (size ratio): a dummy variable where 1
equals multiple carve-outs, and 0 otherwise (MULT): leverage, long-term
debt/parent market capitalization (LEV) and return on assets (ROA).
There are 289 companies in the sample, (t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01. 0.05 and 0.10
levels, respectively.

Model Variable    (1)            (2)           (3)

Mean                0.0204         0.0204        0.0204
(Median)           (0.0037)       (0.0037)      (0.0037)
Size Ratio          0.0085         0.0111        0.1586
                   (2.17) (**)    (2.50) (**)   (8.37) (***)
MULT               -0.0309        -0.0267       -0.0142
                  (-2.95) (***)  (-2.46) (**)  (-1.44)
LEV                 0.0001         0.0001        0.0001
                   (2.43) (**)    (2.33) (**)   (2.22) (**)
ROA                -0.1816        -0.1546       -0.0027
                  (-2.20) (**)   (-1.78) (*)   (-0.03)
Industry Dummies  No             Yes           No
Year Dummies      No             No            Yes
Adjusted R2         0.0709         0.0818        0.2873
F-value             6.49 (***)     1.99 (***)    5.00 (***)

Model Variable    (4)

Mean                0.0204
(Median)           (0.0037)
Size Ratio          0.1630
                   (8.20) (***)
MULT               -0.0149
                  (-1.45)
LEV                 0.0001
                   (1.96) (*)
ROA                 0.0353
                   (0.39)
Industry Dummies  Yes
Year Dummies      Yes
Adjusted R2         0.2822
F-value             3.22 (***)

TABLE 5
Multiple Regression Results - First Price Range Parent Returns This
table reports OLS regression parent returns for carve-out first price
range for the period January 1,1988 to December 31, 2015. There are
four models: base model (column 1), base model with industry dummy
variables (column 2). base model with year dummy variables (column 3),
and base model with industry and year dummy variables (column 4).
Daily stock returns are adjusted by subtracting the contemporaneous
returns for the CRSP equal-weighted index (including distributions).
The market-adjusted returns are regressed on several independent
variables: the modified Loughran and Ritter (2004) investment banker
reputation variables that range from 1.0 to 9.1(1 BR); the ratio of
the mid-point of the adjusted filing range to the initial filing range
where UP1 is positive, and zero otherwise; and initial filing returns.
There are 289 companies in the sample, (t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01, 0.05 and 0.10
levels, respectively.

Model               (1)             (2)            (3)
Variable

Mean                   0.0139         0.0139         0.0139
(Median)              (0.0017)       (0.0017)       (0.0017)
IBR                   -0.0037        -0.0012        -0.0040
                     (-1.55)        (-0.45)        (-1.56)
UP1                    0.0358         0.0320         0.0347
                    (139)            (1.19)         (1.27)
Filing Return          0.4318         0.4627         0.4380
                      (9.43) (***)   (9.51) (***)   (8.59) (***)
Industry
Dummies             No              Yes            No
Year Dummies        No              No             Yes
Adjusted [R.sup.2]     0.2486         0.2333         0.2026
F-value               32.76 (***)     4.51 (***)     3.69 (***)


Model               (4)
Variable

Mean                  0.0139
(Median)             (0.0017)
IBR                  -0.0016
                    (-0.56)
UP1                   0.0296
                     (1.04)
Filing Return         0.4658
                     (8.64) (***)
Industry
Dummies             Yes
Year Dummies        Yes
Adjusted [R.sup.2]    0.1882
F-value               2.34 (***)

TABLE 6
Multiple Regression Results - Parent Carve-out Ex-date Returns
This table reports OLS regression results for parent stock ex-date
returns for the period January 1,1988 to December 31, 2015. There are
four models: base model (column 1), base model with industry dummy
variables (column 2). base model with year dummy variables (column 3)
and base model with industry and year dummy variables (column 4).
Daily stock returns are adjusted by subtracting the contemporaneous
returns for the CRSP equal-weighted index (including distributions).
The market-adjusted returns are regressed on several independent
variables: the percentage of offering proceeds used for debt reduction
or to pay dividends (DEBT): the Loughran and Ritter (2004) investment
banker reputation variable, a range from 1.0 to 9.1 (IBR); the CBOE
Volatility Index (Volatility); return on assets (ROA) and the first
price return, (t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01. 0.05 and 0.10
levels, respectively.

Model         (1)            (2)            (3)
Variable

Mean           -0.0176        -0.0176        -0.0176
(Median)      (-0.0128)      (-0.0128)      (-0.0128)
DEBT            0.0232         0.0274         0.0245
               (2.82) (***)   (3.10) (***)   (2.79) (***)
IBR             0.0043         0.0052         0.0047
               (1.85) (*)     (2.08) (**)    (1.95) (*)
Volatility     -0.2473        -0.2417        -0.2833
              (-4.11) (***)  (-3.64) (***)  (-2.19) (**)
ROA             0.1661         0.2027         0.1496
               (2.63) (***)   (3.00) (***)   (1.99) (***)
First Price     0.1085         0.1063         0.1141
Return         (2.23) (**)    (2.13) (**)    (2.27) (**)
Industry      No             Yes            No
Dummies
Year Dummies  No             No             Yes
Adjusted R2     0.1009         0.0930         0.0927
F-value         7.47 (***)     2.09 (***)     1.98 (***)

Model         (4)
Variable

Mean           -0.0176
(Median)      (-0.0128)
DEBT            0.0280
               (2.92) (***)
IBR             0.0057
               (2.18) (*)
Volatility     -0.2608
              (-2.07) (**)
ROA             0.1622
               (2.04) (***)
First Price     0.1143
Return         (2.21) (**)
Industry      Yes
Dummies
Year Dummies  Yes
Adjusted R2     0.0840
F-value         1.51

TABLE 7
Multiple Regression Results - Subsidiary Carve-out Ex-date Returns
This table reports OLS regression results for carve-out subsidiary
ex-date returns for the period January 1, 1988 to December 31, 2015.
There are four models: base model (column 1), base model with industry
dummy variables (column 2), base model with year dummy variables
(column 3), and base model with industry and year dummy variables
(column 4). Daily stock returns are adjusted by sutracting the
contemporaneous returns for the CRSP equal-weighted index (including
distributions). The market-adjusted returns are regressed on several
independent variables: the ratio of the offering price to the
mid-point of the final filing price where UP2 is positive, and 0
otherwise: fraction of year from initial filing to first price range
(DFPY) and return on assets (ROA). (t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01. 0.05 and 0.10
levels, respectively.

Model         (1)           (2)           (3)           (4)
Variable

Mean            0.0011        0.0011        0.0011        0.0011
(Median)      (-0.0024)     (-0.0024)     (-0.0024)     (-0.0024)
UP2             0.0768        0.0867        0.0928        0.1079
               (2.35) (**)   (2.49) (**)   (2.55) (**)   (2.80) (**)
DPFY            0.0382        0.0356        0.0448        0.0346
               (1.86) (*)    (1.61)        (1.63)        (1.17)
ROA             0.1091        0.1100        0.1457        0.1446
Industry      No            Yes           No            Yes
Dummies
Year Dummies  No            No            Yes           Yes
Adjusted R2     0.0380        0.0027        0.0094       -0.0319
F-value         4.80 (***)    1.03          1.10          0.82

TABLE 8
Robustness Tests -Parent Carve-out Ex-date Returns
This table provides robustness tests of OLS regression results for
parent stock ex-date returns for the period January 1, 1988 to
December 31, 2015. The returns are contrasted over four sets of
variables: multiple vs. single carve-outs (Panel A, columns 1 and 2,
respectively), high vs. low leverage (Panel, columns 3 and 4,
respectively), positive vs. negative ROA (Panel B, columns 1 and 2.
respectively) and high vs. low first price returns (Panel B, columns
3 and 4, respectively). Daily stock returns are adjusted by
subtracting the contemporaneous returns for the CRSP equal-weighted
index (including distributions). The market-adjusted returns are
regressed on several independent variables: the Loughran and Ritter
(2004) investment banker reputation variable, a range from 1.0 to 9.1
(IBR); the CBOE Volatility Index (Volatility); the percentage of the
offering reinvested by the subsidiary (USE); the percentage of
offering proceeds used for debt reduction or to pay dividends (DEBT);
leverage, long-term debt/parent market capitalization (LEV); return on
assets (ROA) and the first price return, (t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01, 0.05 and 0.10
levels, respectively. NA = not applicable.

Variables    (1)           (2)
Panel A:     Multiple vs. Single Carve-outs
             Multiple      Single
N             73           216

Mean Return   -0.0266       -0.0145
IBR           -0.0040        0.0056
             (-0.63)        (2.20) (**)
Volatility    -0.0462       -0.26711
             (-0.36)       (-3.87) (***)
USE           -0.0021       -0.0289
             (-0.13)       (-2.99) (***)
DEBT           0.0278        0.0236
              (1.67) (*)    (2.40) (**)
LEV           -0.0036       -0.0000
ROA            0.2277        0.1075
              (1.31)        (1.51)
First Price   -0.3182        0.1205
Return       (-1.91) (*)    (2.25) (**)

Panel B:     Positive vs. Negative ROA
             ROA > 0       ROA < 0
N            226            63

Mean Return   -0.0167       -0.0207
Volatility    -0.1902       -0.2857
             (-2.58) (**)  (-2.71) (***)
USE           -0.0244       -0.0159
             (-2.56) (**)  (-0.93)
DEBT           0.0219        0.0386
              (2.24) (**)   (2.34) (**)
ROA          NA            NA


Variables      (3)              (4)
Panel A:     High vs. Low  Leverage
             LEV [greater than or equal to] 0.2064  LEV < 0.2064
N            162                                    127

Mean Return   -0.0206                                -0.0137
IBR            0.0050                                -0.0015
              (1.68) (*)                             (-0.33)
Volatility    -0.2480                                -0.1869
             (-2.66) (***)                          (-2.49) (**)
USE           -0.0280                                -0.0161
             (-2.25) (**)                           (-1.54)
DEBT           0.0282                                 0.0217
              (2.24) (**)                            (2.04) (**)
LEV          NA                                     NA
ROA            0.1778                                 0.0642
              (1.76) (*)                             (0.80)
First Price    0.0942                                 0.0907
Return        (1.36)                                 (1.23)

Panel B:     High vs. Low First Price Returns
             Return > 0.0017                        Return < 0.0017
N            146                                    143

Mean Return   -0.0172                                -0.0180
Volatility    -0.3554                                -0.1179
             (-3.14) (***)                          (-1.95) (*)
USE           -0.0195                                -0.0260
             (-1.40)                                (-2.91) (***)
DEBT           0.0246                                 0.0260
              (1.74) (*)                             (2.89) (***)
ROA            0.1272                                 0.1324
              (1.16)                                 (1.89) (*)

TABLE 9
Robustness Tests-Subsidiary Carve-out Ex-date Returns
This table provides robustness tests of OLS regression results for
subsidiary stock ex-date returns for the period January 1,1988 to
December 31, 2015. The returns are contrasted over four sets of
variables: multiple vs. single carve-outs (panel A, columns 1 and 2,
respectively), high vs. low leverage (panel A, columns 3 and 4,
respectively), positive vs. negative ROA (panel B, columns 1 and 2,
respectively) and high vs. low first price returns (panel B, columns
3 and 4, respectively). Daily stock returns are adjusted by
subtracting the contemporaneous returns for the CRSP equal-weighted
index (including distributions). The market-adjusted returns are
regressed on several independent variables: leverage, long-term
debt/parent market capitalization (LEV); the percentage of offering
proceeds used for debt reduction or to pay dividends (DEBT); return on
assets (ROA); the ratio of the mid-point of the final filing price and
the offering price where UP2 is positive, and 0 otherwise and the
fraction of year from initial filing to first price range (DFPY).
(t-values are in parentheses.)
(***), (**) and (*) indicate significance at the 0.01, 0.05 and 0.10
levels, respectively. NA = not applicable.

Variables    (1)           (2)
Panel A:     Multiple vs. Single Carve-outs
             Multiple      Single
N             73           216

Mean Return    0.0010        0.0011
LEV           -0.0012        0.0000
             (-1.83) (*)    (0.94))
ROA            0.2623        0.1010
              (2.47) (**)   (1.67) (*)
UP2            0.1064        0.0729
              (2.57) (**)   (1.69) (*)
DFPY           0.0598        0.0245
              (1.73) (*)    (0.94)

Panel B:     Positive vs. Negative ROA
             ROA > 0       ROA < 0
N            226            63

Mean Return    0.0024       -0.0038
DEBT           0.0088       -0.0281
              (1.05)       (-3.28) (***)

ROA          NA            NA
UP2            0.0792        0.0940
              (1.84) (*)    (2.73) (***)
DFPY           0.0306        0.0604
              (1.25)        (1.87) (*)

Variables    (3)                                       (4)
Panel A:     High vs. Low Leverage
             LEV [greater than or equal to] 0.2064     LEV < 0.2064
N            162                                       127

Mean Return    0.0028                                   -0.0012
LEV

ROA            0.0730                                    0.1891
              (0.97)                                    (2.61) (**)
UP2            0.1218                                    0.0498
              (2.62) (***)                              (1.08)
DFPY           0.0598                                    0.0245
              (1.73) (*)                                (0.94)
Panel B:     High vs. Low First Price Returns
             Return [greater than or equal to] 0.0017  Return < 0.0017
N            146                                       143

Mean Return    0.0034                                   -0.0013
DEBT           0.0023                                   -0.0005
              (0.22)                                   (-0.05)
               0.0677                                    0.1768
ROA           (0.83)                                    (2.71) (***)
UP2            0.0542                                    0.1155
              (1.10)                                    (2.69) (***)
DFPY           0.0268                                    0.0415
              (0.67)                                    (1.84) (*)
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Author:Thompson, Thomas
Publication:Quarterly Journal of Finance and Accounting
Date:Jan 1, 2019
Words:11279
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