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An examination of the long-term results of acquired carve-out/spin-off combinations.

Introduction

US 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 a special dividend. We investigate the 76 acquired carve-out/spin-off combinations (COSOs) during the period from 1988 to 2012. Although there have been other long-term carve-out and spin-off studies, this is the first study to test hypotheses related to the long-term results of acquired COSOs and those that continue to exist.

The carve-out/spin-off combination has gained prominence since the Klein, Rosenfeld and Beranek (1991) study, which reports that carve-outs are part of a two stage process. In the Klein, Rosenfeld and Beranek (1991) sample period (1966-1983), only two of 52 carve-outs (3.85% of the sample) were subsequently spun off. For our sample period (1988-2006), 76 of 282 carve-outs (26.95% of our sample) were spun-off by their parents. We observe that for the sample period, COSOs have market adjusted carve-out ex-date returns of 21.46%; acquired carve-outs had 21.56% returns, and reacquired carve-outs had 18.35% returns (but not reported in tables).

COSOs benefit parent and investors in three main ways. First, given that COSOs such as Travelers and Conoco are the largest IPOs with only 20% of the company's shares offered, there may be an upward limit to offering sizes. Other notable acquired COSOs are Guidant Corp, Palm Inc. and Freescale Semiconductor. (1) The follow-on spin-off is tax-free if parents retain ownership of 80% in the subsidiary (26 US Code Section 355). (2) Also, the retained insider ownership creates overhang that reduces the impact of underpricing. Second, since most spin-offs distribute less than a 1:1 ratio of subsidiary to parent shares, many shareholders tend to sell fractional or odd-lot shares soon after a spin-off (Vijh 1994). However, carve-outs can establish markets for shares prior to spin-offs and reduce the potential for the subsequent sell-off of subsidiary shares (Thompson and Apilado 2006). Also, carve-outs allow parents to showcase their subsidiaries to prospective buyers (Klein, Rosenfeld and Beranek 1991). Leland and Pyle (1977) report that insiders, by retaining their shares, signal their firms' value to the market. Similarly, Loughran and Ritter (2002) show that insiders prefer to hold their shares to be divested later and then benefit from the potential market price increases. Third, similar to other carve-outs, COSOs increase parent company focus (reduce diversification) and to create a pure play in the subsidiary stock. The initial carve-out followed by a second divestiture event increases company focus when the combination carve-out reduces number of industries for the parent. In cases where the subsidiary trades as a separate entity, the combination carve-out provides a pure play. (3) This tends to unmask subsidiary values.

We extend the literature by testing four hypotheses related to long-term results for acquired COSOs: partial price adjustment, leaning against the wind, managerial discretion and pre-announced spin-offs. The implications are that investors can economically benefit from acquired COSOs. We observe that independent variables explain 38% of the variation in carve-out ex-date returns for acquired COSOs with pre-announced spinoffs.

Data and Analytical Methods

STUDY SELECTION PROCEDURE

To be included in our study, a COSO had to meet two initial criteria. First, consistent with our definition of carve-outs, parents must retain 80% or more control in the subsidiary after the carve-out and must remain publicly traded entities. For the 1990 and prior period, we examined new releases for initial public offerings of subsidiaries. For the post-1990 period, we started with the list of carve-outs in Mergers and Acquisition Magazine. Second, we then searched Mergent and news articles to determine if the parent conducted a spin-off. For our sample period (1988-2012), 76 of 282 carve-outs (26.95%) were spun-off by their parents. (4)

We verify announcements in Investment Dealer's Digest, the Dow Jones News Service or another news service available in FACTIVA. However, if the spin-off was announced prior to the carve-out event, we use the filing date for the second event announcement. This avoids the confounding effect of spin-off announcements concurrent with and/or prior to carve-out events. We obtain operating data including book values of equity and debt from Research Insight (Compustat) and Mergent. SEC filings and news articles provide additional information for the sample. The Center for Research in Security Prices (CRSP) provides stock return data.

METHODOLOGY AND HYPOTHESIS DEVELOPMENT

Following Vijh (2002) and Hogan and Olson (2004), we measure carve-out initial returns from the offering price to first day close. Consistent with Allen and McConnell (1998), we measure spin-off announcement-period cumulative excess returns for stocks over the three day period centered on the announcement day. Spin-off ex-date returns are holding period returns for the previous day close to the spin-off date close. In addition to spin-offs, third events include acquisitions by third parties or bankruptcy. We contrast these results with those of continuing COSOs. Since announcements for bankruptcy and for continuing COSOs coincide with termination of transactions, we use cumulative excess returns for the day prior and the announcement date. (5) Longer term returns from carve-out to spin-off and from spin-off to third event and beyond are annually adjusted weekly returns. Consistent with Maxwell and Rao (2003) and Thompson and Apilado (2006), stock returns are compared to CRSP equal-weighted index results (to include distributions) during the sample period. Following Vijh (2002), we use market-adjusted stock returns for carve-outs. In the following subsections we examine specific hypotheses for COSOs.

Partial Price Adjustment Hypothesis

The initial filing 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). (6) This range reflects the lowest acceptable price from the issuer and the highest offering price that the underwriter estimates will clear the market (Hanley 1993). Thus, Hanley supports the Benveniste and Spindt (1989) theory that due to a partial adjustment of offering prices, IPO offering prices that are greater than the initial filing price range increase underpricing. Since this range should be the best credible offer for the issuer, prices within this range demonstrate that the offering price reflects all information and that 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 in that they must sell all offering shares to maintain the underwriter's reputation. Thus, 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 for IPOs to include changes in filing range from initial filing through final filing to the offer price. Thompson (2010) validates the partial price adjustment for equity carve-outs. We examine the impact of the adjusted filing mid-points and partial price adjustments on carve-out returns.

Expanding Hanley's (1993) study, Bradley and Jordan (2002) and Loughran and Ritter (2002) show that the timing of filing range increases or decreases influences underpricing. Bradley and Jordan (2002) use two measures for increases and decreases of initial filing ranges: UP1 (DW1) is the percentage difference between the original midrange file price and the adjusted midrange file price for those companies that adjust their file range up (down), zero otherwise. Following Bradley and Jordan (2002), we define the variables as:

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

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

where adjusted and original reflect the original and final adjusted file ranges. These two variables allow for the possibility of an asymmetric effect due to filing range increases or decreases.

Next, Bradley and Jordan (2002) identify two variables to identify possible asymmetric effects between the final file range and the offering price. UP2 (DW2) is the percentage difference between the final midrange file price and the final offer price for those companies that have offer prices above (below) the adjusted midrange file price, zero otherwise.

Leaning Against the Wind Hypothesis

Loughran and Ritter (2002) advance a "leaning against the wind" hypothesis that provides an alternative explanation to partial price adjustment. They offer that IPO investors tend to overreact and bid the price above the long-term value. Then, IPO prices revert to their long-term values. Thus, a testable implication of this hypothesis is that there should be a negative correlation between first day returns and subsequent long-term returns.

Managerial Discretion Hypothesis

Allen and McConnell (1998), in their managerial discretion hypothesis, offer that corporations initiate carve-outs due to their high levels of leverage or operational troubles. 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.

Conversely, 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.

Pre-announced Spin-offs

Thompson and Apilado (2006) report that carve-outs with spin-offs announced prior to or concurrent with the carve-out date (hereafter, pre-announced spin-offs) have higher returns than COSOs with spin-offs announced after the carve-out date (hereafter, post-announced spin-offs). In this study there are 43 COSOs with pre-announced spin-offs and 33 with post-carve-out announced spin-offs. We surmise that the pre-announced spin-offs allow the issuer to increase demand for their offering with the pending follow-on spin-off. Since issuers must report all significant information during the IPO registration period, reporting a-future spin-off allows the issuer to legitimately increase investor demand in the company prior to the offering date. This leads to higher initial returns. To examine whether COSOs with pre-announced spin-offs have higher returns than post-announced spin-offs, we use a dummy variable, AN, where 1 = pre-announced and 0 otherwise. A positive AN coefficient indicates support for the pre-announced spin-off hypothesis.

VARIABLES

Next, we define and provide the economic intuition for our variables that test the hypotheses. From these factors we construct our multivariate cross-sectional tests for stock returns. The variables detailed below are statistically significant and maintain their expected coefficient sign for the announcement, ex-date, carve-out to spin-off, spin-off to third event over three periods: pre-bubble, bubble or post-bubble.

Leverage

Madura and Nixon (2002) observe that distressed companies tend to have their subsidiaries reimburse them with debt payments or dividends from the offering and that parent carve-out announcement returns increase due to the perceived lower risk from reduced leverage. We use leverage, the ratio of the book value of long-term debt to parent market capitalization prior to the carve-out, to identify distressed parents. (7) Indicating higher risk, leverage should be positively related to stock returns (Schipper and Smith 1986).

Changing Issuer Objective Function

Loughran and Ritter (2004) and Hogan and Olson (2004) report that the increased underpricing during the bubble period (1999-2000) results from a changing issuer objective function for IPOs and equity carve-outs, respectively. The changing issuer objective function states that issuing firms are more willing to accept underpricing due to increased importance of analyst coverage and the increased use of spinning, the practice where underwriters allocate IPOs to high profile customers to achieve future business. For COSOs we examine the impact of the changing issuer objective function over four periods: the pre-bubble period (1988-1998), the bubble period (1999-2000), the post-bubble period (2001-2006) and the total period (1988-2006). Thus, we anticipate changes in signs from the pre-bubble period to the bubble period coefficients to indicate changing issuer objectives.

Size Effect

Asquith and Mullins (1986) and Mikkelson and Partch (1986) report a negative correlation between size and stock returns. Market capitalization is inversely related to the risk of the carve-out (Vijh 1999). The relatively large initial offering cash inflows result in market valuations of retained insider holdings from one-third to four times the offerings' values. Vijh (1999) offers that mean carve-out offering sizes are larger than pure IPO offerings. Given the higher market capitalization for COSOs, the size effect is particularly applicable to this study. We use the ratio of carve-out offering size to parent company market capitalization (SIZR) and the log of carve-out offering size (LSIZ) to test the size effect. Thus, stock returns should be negatively related to the SIZR or LSIZ parameter.

Market Ebullience

Logue (1973) offered that market ebullience was positively related to IPO returns. The OBOE Volatility Index (Volatility) represents the implied volatility of S&P 500 Index options. The VIX (Volatility) predicts future index returns and represents market ebullience and the potential for future public offerings (Dennis, Mayhew and Stivers 2006). A high (low) volatility indicates high (low) risk for public offerings. Also, the volatility variable provides a proxy for market ebullience as defined by Logue (1973). Thus, we anticipate that returns vary with the volatility parameter.

Investment Banker Reputation

Prestigious underwriters successfully complete the IPO process. Loughran and Ritter (2004) revise the Carter and Manaster (1990) investment banker reputation rankings that are based on the underwriters' relative order on the prospectus (tombstone). The Loughran and Ritter (2004) ratings range from a low of 1.0 to a high of 9.1 and account for penny stock IPOs that are avoided by prestigious investment bankers. Following Hogan and Olson (2004), we use a dummy variable for prestigious investment bankers (IBR) where 1 indicates a Loughran and Ritter (2004) rating of 8.0 or better and 0 otherwise.

Welch (1989) finds that prestigious underwriters use their reputation capital to certify or signal high quality issues. Thus, returns should vary inversely with the investment banker reputation coefficient, IBR. However, Beatty and Welch (1996) show that before 1990 underwriter reputation varies inversely with returns. After 1990 they share a positive relationship with returns. 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.

Corporate Focus

Schipper and Smith (1986) and Vijh (2002) show that higher spinoff returns result from increased corporate focus. The increased returns for cross-industry carve-outs are due to increased scrutiny by investors and eliminated cross-subsidies for parents and subsidiaries. Schipper and Smith (1986) and Vijh (2002) observe that increased corporate focus provides higher spin-off returns. The increased returns reflect added scrutiny by investors and security analysts. Indicating increased corporate focus, a cross industry value of 1 indicates cross industry (different two digit SIC) carve-outs and 0 otherwise. Thus, COSO returns should be positively related to the cross-industry indicator, SIC.

Overhang

For COSO offerings, parents sell no more than 20% of their ownership. Thus, overhang, unsold subsidiary shares divided by the shares sold, could be related to underpricing, as defined as the percentage change in price from the initial offering price to the first closing price. Bradley and Jordan (2002) show that overhang provides a positive signal for investors that later benefit from the subsidiary's price appreciation. Thus, overhang can be related to underpricing. However, only the shares from the offering are underpriced. The subsidiary shares retained by parent company insiders reflect their market value. Thus, for a given level of underpricing, share dilution declines as overhang increases (Bradley and Jordan 2002). Therefore, returns should vary with overhang.

We use the Thompson (2010) definition of overhang as:

Overhang = % shares retained/ (1-% shares retained). (3)

Loughran and Ritter (2002) identify two reasons for overhang. First, there could be a scarcity premium for firms that sell a small fraction of the company to the public. This is especially true for companies that plan to spin off their subsidiaries. A second reason is that there could be an optimal amount of capital to be raised in an IPO. If the offering is small relative to the pre-issue shares outstanding, the wealth increase for non-selling shareholders will exceed the dollar loss due to underpricing and dilution. Given that COSO parents retain at least 80% ownership, overhang can be 4.0 or greater. Thus, it is most likely that equity carve-outs generate wealth increases for non-selling shareholders and that returns will vary with overhang.

Empirical Analysis and Initial Results

We test our hypotheses in two phases. First, we investigate possible changing issuer objectives from the carve-out (Carve-out Event Results section) to the spin-off phase (Spin-off Ex-date Results section). Thereafter, we examine differences between variables by terminal event type after the spin-off (Terminal Events Announcement section). (8)

SUMMARY STATISTICS

Table 1 reports the descriptive data for COSO companies initiated in the pre-bubble, 1988-1998 (column 1); bubble, 1999-2000 (column 2); post bubble, 2001-2012 (column 3); total period, 1988-2012 (column 4) and for other carve-outs for the total period (column 5). Although 20% of the COSO's initial value is offered as a carve-out, offering sizes ($699.14 million) are over three times the offering sizes of other carve-outs ($205.12 million) and over five times greater than $116.85 million, the average IPO for a similar period (Ritter 2013).

COSO parents retain over 80% ownership for the partial offering compared to 70% for other carve-outs. COSOs pay 48.93% of the initial proceeds as dividends or to repay debt, versus 34.58% for other carve-outs. Other carve-outs reinvest 48.25% of the offering proceeds, but COSOs reinvest 39.42%.

Over 90% of COSO underwriters are prestigious (Loughran and Ritter 2004), with a rating of 8 or better, versus 84.62% for other carve-outs. As shown by UP1 coefficients, COSOs increase their initial filings by 4.96% versus 3.85% for other carve-outs. Other carve-out parents are more leveraged (55.88%) compared to 37.59% for COSO parents. The time period from the carve-out to the spin-off ex-date is 1.88 years for the pre-bubble period (Table 1, column 1), which reduces to 1.01 and 1.00 for the bubble (Table 1, column 2) and post-bubble periods (Table 1, column 3).

Table 2 provides a list of acquired COSOs for the period from 1988 to 2012. We report carve-out, spin-off and acquisition dates and the time frames from carve-out to spin-off and from spin-off to acquisition. The period from carve-out to spin-off ranges from 0.30 to 7.43 years, with a mean (median) of 1.17(0.69) years. This mean is less than the 1.44 year mean for all COSOs (Table 1, column 4). The time frame from spin-off to acquisition ranges from 0.18 to 21.61 years with a mean (median) of 5.63 (4.52) years. Given a 7.22-year mean for spin-off to third event for all COSOs, acquired COSOs demonstrate a shorter time from carve-out to third event.

REGRESSION RESULTS-CARVE-OUT TO SPIN-OFF PHASE

To optimize our multivariate regressions we apply the Schwarz Bayesian Criterion (SBC) to several variables used in carve-out and spin-off studies. Thereafter, we apply the Variance Inflation Factor (VIF) to reduce the threat of multicollinearity. With a VIF close to 1, and with the resulting variables, we construct our cross-sectional tests for the regressions. We discuss significant results below.

Carve-out Event Results

Table 3 reports carve-out event results for COSOs initiated in the pre-bubble (column 1), bubble (column 2), post-bubble (column 3) and total (column 4) periods. Market adjusted carve-out returns range from 10.83% in the post-bubble period (Table 3, column 3) to 54.84% in the bubble period (Table 3, column 2) for an average of 21.46% for the total period (Table 3, column 4). The F-values are significant at the 5% level or better for all periods. The independent variables explanation of returns ranges from 27.79% in the pre-bubble period (Table 3, column1) to 76.79% for the post-bubble period (Table 3, column 3) with a mean of 41.32% for the total period.

The positive USE coefficient is significant at the 5% level or better for COSOs initiated in the pre-bubble (Table 3, column 1) and for the total periods (Table 3, column 4). This contradicts the managerial discretion hypothesis of Allen and McConnell (1998) and supports Mikkelson and Partch (1986). Thus, COSOs that reinvest offering proceeds generally have higher carve-out ex-date returns than COSOs that pay out proceeds to reduce debt or to parents as dividends. Supporting the partial price adjustment theory of Bradley and Jordan (2002) that partial price increases before the offering date increase ex-date returns, the positive UP1 parameters for the pre-bubble (Table 3, column 1) and total (Table 3, column 4) periods and the positive UP2 coefficient for the post-bubble (Table 3, column 3) and total periods (Table 3, column 4) are significant at the 5% level or better. Indicating an inverse relationship between volatility and returns, the volatility coefficient is 1% significant and negative for the post-bubble period (Table 3, column 3).

Returns from Carve-out to Spin-off

Table 4 provides regression results for the period from the carve-out to the spin-off ex-date for COSOs initiated in the pre-bubble (column 1), bubble (column 2), post-bubble (column 3) and total periods (column 4). All regression F-values for the period are significant at the 5% level or better. The independent variables explain from 30.63% for pre-bubble returns (Table 4, column 1) to 68.17% for post-bubble returns (Table 4, column 3).

Indicating low risk for COSOs, the negative SIZR parameter is significant at the 5% level for the pre-bubble (Table 4, column 1) and bubble (Table 4, column 2) periods. The AN coefficient reflects a positive relationship with returns as it is positive and marginally significant in the pre-bubble period (Table 4, column 1). However, it indicates an inverse relationship with post-bubble period returns (Table 4, column 3), which has a negative parameter significant at the 5% level. Given these conflicting results, we examine the AN coefficient further in the next section.

Supporting the "leaning against the wind" hypothesis of Loughran and Ritter (2002), the signs reverse from the positive carve-out ex-date returns (Table 3) to negative carve-out to spin-off period returns (Table 4). Consistent with the partial price adjustment hypothesis, the negative UP1 coefficient is significant at the 5% level or greater for all periods. Reflecting limited support for the managerial discretion hypothesis, the negative USE parameter is marginally significant for the total period (Table 4, column 4).

Pre-announced Versus Post-announced Spin-offs

Table 5 contrasts results for pre-announced and post-announced spin-offs over the carve-out initial period and from the carve-out to spin-off. We report carve-out market adjusted results for pre-announced and post-announced spin-offs in columns 1 and 2, respectively. For carve-out to spin-off period results, we provide pre-announced and post-announced spin-off results in columns 3 and 4, respectively. After applying the Schwarz Bayesian Criterion, we adopt the variables for the Table 5 multivariate regressions.

Consistent with Thompson and Apilado (2006) and supporting the pre-announced spin-off theory, the pre-announced spin-offs have greater returns than post-announced spin-offs. The regressions for pre-announced spin-offs during the carve-out initial period (Table 5, column 1) have positive UP1 coefficients and F-values that are 1% significant. The negative LSIZ parameter is significant at the 5% level. The independent variables explain 38.34% of the variation in returns. Also, the COSOs with pre-announced spin-offs have returns that are 9% greater than COSOs with post-announced spin-offs. Thus, the registration period allows for increased demand for carve-outs with pre-announced spin-offs and increases initial returns.

COSOs with post-announced spin-offs have positive UP1, UP2 and BUB coefficients and F-values significant at the 1% level for the carve-out initial period (Table 5, column 2). The independent variables explain 82.29% of the variation in initial returns. Thus, all COSO (pre- and post announced spin-off) initial results support the partial price adjustment theory. The positive, but marginally significant USE parameter, provides limited support for Mikkelson and Partch (1986) and slight contradiction to the managerial discretion hypothesis.

Supporting the "leaning against the wind hypothesis" of Loughran and Ritter (2002), the carve-out to spin-off period returns of -2.88% (Table 5, column 3) for COSOs with pre-announced spin-offs provide over 28% reversal from the carve-out initial returns (Table 5, column 1). The negative USE and UP1 parameters and F-values are marginally significant at the 1% level. Given negative returns and positive initial variables, the negative USE coefficient indicates support for Mikkelson and Partch (1986). Similarly, the negative UP1 coefficient supports the partial price adjustment hypothesis of Bradley and Jordan (2002).The independent variables explain 30.91% of the variation in returns.

COSOs with post-announced spin-offs have limited results for the carve-out to spin-off period (Table 5, column 4). The negative SIZR, UP1 and BUB coefficients and the F-values are significant at the 5% level. The negative IBR parameter is marginally significant. The independent variables explain 29.61% of the variation in returns. The -1.38% returns are greater than those for pre-announced spin-offs (Table 5, column 3). Also, the return reversal from the carve-out ex-date to the carve-out to spin-off period return is 10% less than those for pre-announced spin-offs and supports the "leaning against the wind hypothesis."

Spin-off Ex-date Results

Table 6 reports spin-off ex-date returns for COSOs initiated in the pre-bubble (column 1), bubble (column 2), post-bubble (column 3) and total periods (column 4). (9) The regressions have F-values significant at the 10%, 5%, 5% and 1% levels for the pre-bubble (Table 6, column 1), bubble (Table 6, column 2), post-bubble (Table 6, column 3) and total periods (Table 6, column 4), respectively. The independent variables explain variation in returns from 17.88% for the pre-bubble period (Table 6, column 1) to 62.29% for the bubble period (Table 6, column 2).

Reflecting the influence of pre-announced spin-offs, the positive AN coefficient is significant at the 5% level for COSOs begun in the bubble period (Table 6, column 2). Consistent with the changing issuer objectives function noted by Loughran and Ritter (2004) and Hogan and Olson (2004), the volatility parameter is positive and marginally significant for COSOs initiated in the pre-bubble period but negative and 5% significant for those begun in the bubble period (Table 6, column 2).

Supporting the partial price adjustment hypothesis, the negative UP1 coefficient is significant at the 5% level for the bubble (Table 6, column 2) and total periods (Table 6, column 4). The positive DW2 parameter is significant at the 1% level for pre-bubble, post-bubble and total period COSOs (Table 6, columns 1, 3 and 4, respectively). However, during the carve-out ex-dates, UP1 and UP2 coefficients are positive (Table 1, column 4). These sign reversals indicate support for the "leaning against the wind" hypothesis of Loughran and Ritter (2002).

TERMINAL EVENT ANNOUNCEMENT

We examine significant differences for COSO variables by terminal event type and for continuing COSOs. First, we provide summary statistics. Next, we report significant differences by event type.

Summary Statistics--Terminal Event Announcement Versus Continuing COSOs

Table 7 reports levels for COSOs by event type: acquired (column 1), bankruptcy (column 2) and for continuing COSOs (column 3). Significant differences for acquired and bankrupt and acquired and continuing COSOs are reported in columns 4 and 5, respectively. (10) There are 39 acquired and 28 continuing COSOs in the sample. (11) We observe that 11.84% of the sample COSOs are bankrupt. This compares with Kooli and Keknassi (2007) who report 20.23% of IPO bankruptcy during a similar period.

The 0.61% differences between acquired and bankrupt COSO spinoff returns are significant at the 5% level. Reflecting the positive acquisition announcement effect noted by Mulherin and Boone (2000), the differences between acquired and bankrupt (Table 7, column 4) and acquired and continuing COSO (Table 7, column 5) third event announcement returns are significant at the 5% level. The differences between acquired and bankrupt (Table 7, column 4) and acquired and continuing COSO (Table 7, column 5) for the spin-off to the terminal event returns (SOTE) are significant at the 5% level. Reflecting negative SOTE returns for bankrupt COSOs, the difference between acquired COSOs and bankrupt COSO SOTE returns is significant at the 1% level. Similarly, the differences between acquired and bankrupt returns from carve-out to spin-off are significant at the 5% level (Table 7, column 4).

Consistent with the managerial discretion hypothesis, continuing COSOs use 68% of offering proceeds to repay debt or to pay dividends (Table 7, column 3), but acquired COSOs use only 33.64% (Table 7, column 1). The 34.36% difference (Table 7, column 5) is significant at the 5% level. Consistent with Mikkelson and Partch (1986) and contrary to the managerial discretion hypothesis, acquired COSOs reinvest 51.36% of carve-out offering proceeds (Table 7, column 1) contrasted with 21.29% for continuing COSOs (Table 7, column 3).

Indicating a low initial reduction in initial filing range (DW1 coefficient) for continuing COSOs and consistent with the partial price adjustment hypothesis, the 4.25% difference between acquired and continuing COSOs (Table 7, column 5) is significant at the 5% level. Reflecting the longevity of continuing COSOs, the period from the spin-off to terminal event is over 10 years (Table 7, column 3) versus 5.63 years and 3.66 years for acquired (Table 7, column 1) and bankrupt COSOs (Table 7, column 2), respectively. The differences between spin-off to terminal event periods between acquired and bankrupt COSOs (Table 7, column 4) and between acquired and continuing COSOs (Table 7, column 5) are significant at the 1% level.

Terminal Event Announcement Period Results by Event Type Versus Continuing COSOs

Table 8 contrasts terminal event announcement returns by event type: acquisition (column 1), bankruptcy (column 2) and continuing COSOs (column 3). Column 4 provides total sample results. The F-values for all regressions are significant at the 5% level or better. Independent variables explain from 22.63% of returns for continuing COSOs (Table 8, column 3) to 99.46% for bankrupt COSOs (Table 8, column 2).

Acquired COSOs (Table 8, column 1) have positive volatility, leverage and UP1 coefficients significant at the 5% level or better. Supporting the partial price adjustment hypothesis, acquired COSOs have increased initial filing range adjustments. Their parents have high leverage. Reflecting the acquired COSO results (Table 8, column 1) the positive leverage parameter for the total sample (Table 8, column 4) is significant at the 5% level. Bankrupt COSOs (Table 8, column 2) have positive Cross Industry and UP1 parameters and negative IBR coefficients significant at the 1% level. The negative SIZR parameters are marginally significant.

Continuing COSOs (Table 8, column 3) have negative Cross Industry and UP1 coefficients and F-values significant at the 5% level or better. Thus, for the terminal event announcement, continuing COSOs support the partial price adjustment hypothesis. The negative IBR parameters are marginally significant.

Conclusions and Implications

We test four hypotheses during various stages of the COSO life cycle: carve-out ex-date, carve-out to spin-off, spin-off ex-date and spin-off to terminal event. The first hypothesis, the partial price adjustment hypothesis of Bradley and Jordan (2002), holds for all COSO phases. Also, reversal of returns from the carve-out ex-date to carve-out event to spin-off period returns and from the carve-out ex-date to spin-off ex-date returns support the "leaning against the wind" hypothesis of Loughran and Ritter (2002).

Next, reflecting a contradiction to the managerial discretion hypotheses of Allen and McConnell (1998), our results for acquired COSOs support Mikkelson and Partch (1986). Generally, COSOs that reinvest offering proceeds have higher carve-out ex-date returns than carve-outs that pay out proceeds to reduce debt or to parents as dividends. However, in support of the managerial discretion hypothesis, we observe that continuing and bankrupt COSOs tend to use offering proceeds to repay debt or to issue dividends to their parents.

Related to our fourth hypothesis, COSOs with pre-announced spin-offs out perform COSOS with post-announced spin-offs. This hypothesis holds for the carve-out ex-date, carve-out to spin-off and spin-off ex-date periods. Thus, one should anticipate higher returns for carve-outs with spin-offs announced before or concurrent with a carve-out ex-date.

In addition to our examination of hypotheses, we contrast results for acquired, continuing and bankrupt COSOs. We observe that carve-out returns for acquired and continuing COSOs are significantly larger than for the highly leveraged bankrupt COSO returns. Indicating increased parent company focus, 79.31% of continuing COSOs are Cross Industry. To have a tax-free spin-off, parents must retain 80% control of their subsidiary, which results in all COSOs having an overhang of four or greater. Unlike other carve-out studies, overhang does not seem to be a significant factor for COSOs in this study.

References

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"Distribution of Stock and Securities of a Controlled Corporation," Title 26 U.S. Code, Sec. 355 2012.

Hanley, K.W. "The Underpricing of Initial Public Offerings and the Partial Adjustment Phenomenon." Journal of Financial Economics 34.2(1993): 231-20.

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Kooli, M., and S. Meknassi. "The Survival Profile of US IPO Issuers." The Journal of Wealth Management 10.2(2007): 105-119.

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Loughran, T., and J.R. Ritter. "Why Don't Issuers Get Upset about Leaving Money on the Table in IPOs?" The Review of Financial Studies 15.2(2002): 413-443.

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Mikkelson, W.H., and M.M. Partch. "Valuation Effects of Security Offerings and the Issuance Process." Journal of Financial Economics 15.1-2(1986): 31-60.

Mulherin, J.H., and A.L. Boone. "Comparing Acquisitions and Divestitures." Journal of Corporate Finance 6.2(2000): 117-139.

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"Standard Instructions for Filing Forms under Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975," Title 17 U.S. Code Sec. 229 (2013) update.

Thompson, T.H. "Partial Price Adjustments and Equity Carve-outs." The Financial Review 45.3(2010): 743-759.

Thompson, T.H., and V. Apilado. "Investment Banker Reputation and Two-stage Combination Carve-outs and Spin-offs." Journal of Banking and Finance 30.1(2006): 85-110.

Vijh, A.M. "Long-term Returns from Equity Carve-outs." Journal of Financial Economics 51.2(1999): 273-308.

Vijh, A.M. "The Positive Announcement-period Returns of Equity Carve-outs: Asymmetric Information or Divestiture Gains?" Journal of Business 75.1(2002): 153-190.

Vijh, A.M. "The Spin-off and Merger Ex-date Effects." The Journal of Finance 49.2(1994): 581-609.

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THOMAS H. THOMPSON

Lamar University

(1) We provide a list of acquired COSOs from 1988-2012 in Table 2.

(2) Spin-offs are similar to stock dividends in that no cash is received by the investor. Investors receive subsidiary shares from the parent.

(3) A pure play separates unrelated assets into two traded companies. In the case of equity carve-outs, investors can select either the parent or the newly formed subsidiary.

(4) We retain eight non-financial and three gas utility companies since these companies have lower regulatory impact than banks and electric utilities. Thus, we use all COSOs for the sample period.

(5) Trading data for continuing COSOs will end on the last available date, which for this study is December 31, 2012.

(6) The price can change plus or minus 20% before a revised filing is required.

(7) Also, we applied a dummy variable for distressed parents where 1 = a negative parent return on assets for the year prior to the carve-out and 0 otherwise. However, these results are inconclusive.

(8) We report results of less than 30 observations as necessary for completeness.

(9) We examine spin-off announcement returns, but the results are inconclusive. This can be due to 43 of the 76 spin-offs are announced before the carve-out date. Since the companies do not trade until the carve-out date, the spin-off announcement effects are most likely reflected in parent company announcement returns or in the carve-out ex-date returns.

(10) Several variables reported in Table 1 have no significant differences by event type.

(11) By definition, continuing COSOs do not terminate. We use the end of the sample period (December 31, 2012) as the terminal announcement date for continuing COSOs.
TABLE 1
Summary Statistics

This table reports descriptive data for combination
carve-out-spin-offs (COSOs) initiated during the pre-bubble
period. 1988-1998 (column 1); the bubble period, 1999-2000
(column 2); the post-bubble period. 2001-2012 (column 3);
the total period 1988-2012 (column 4) and for other carve-
outs (column 5). Descriptive data include subsidiary
offering size; parent market capitalization for the day
before the carve-out; the time from carve-out to spin-off
(CO to SO) in years; the time from spin-off to terminal
event (SO to TE) in years; a dummy variable if the spin-off
is announced prior to or concurrent with the carve-out ex-
date (AN); the ratio of the carve-out offering size to
parent market capitalization (SIZR); the percentage of the
subsidiary retained by the parent (% retained); the ratio of
long-term debt to parent market capitalization (leverage); a
dummy variable for Cross Industry carve-outs (Cross
Industry); the percentage of the offering used to retire
debt or to pay dividends (DEBT); the percentage of the
offering reinvested by the issuer (USE); overhang. %
retained by the parent -(1-% retained); a dummy variable
where 1 is a high investment banker reputation variable
(IBR. a modified Loughran and Ritter (2004) rating of 8.0 or
greater and 0 otherwise); the CBOE Volatility Index
(Volatility); the ratio of the mid-point of the adjusted
filing range to the initial filing range where UP1 (DW1) is
positive (negative) and zero otherwise; and the ratio of the
offering price to the mid-point of the final filing range
where UP2 (DW2) is an increase (decrease) and zero
otherwise. NA = not applicable.

Time Frame:                 (1)          (2)           (3)
                         1988-1998     1999-2000     2001-2012

Variable
N                           38            16            22
Offering size ($ mil)     525.28        613.53        1061.73
(Median)                 (130.49)      (407.50)      (233.00)
Market cap ($ mil)       10214.49      42399.01      28942.88
(Median)                 (3800.03)    (16673.73)     (6344.67)
COtoSO (years)            1.8821        1.0156        0.9955
SOtoTE (years)            8.5908        7.6216        4.5714
AN                        0.5000        0.7500        0.5455
SIZR                      0.0995        0.0465        0.0669
% Retained                0.8166        0.8469        0.8191
Leverage                  0.4675        0.2877        0.2818
Cross-Industry            0.7105        0.5625        0.5909
DEBT                      0.4521        0.4331        0.5945
USE                       0.3676        0.4419        0.4055
Overhang                  5.2600        6.1444        7.3945
IBR                       0.8947        1.0000        0.8636
Volatility                0.1804        0.2502        0.2097
UP1                       0.0235        0.1056        0.0541
DW1                       -0.0152       -0.0096       -0.0813
UP2                       0.0300        0.1128        0.0198
DW2                       -0.0376       -0.0227       -0.0523

Time Frame:                 (4)           (5)
                           Total         Other
                          Period      Carve-Outs
Variable
N                           76            206
Offering size ($ mil)     699.14        205.12
(Median)                 (189.40)       (81.00)
Market cap ($ mil)       22411.56      10822.51
(Median)                 (4869.39)     (1464.68)
COtoSO (years)            1.4430          NA
SOtoTE (years)            7.2233          NA
AN                        0.5658          NA
SIZR                      0.0789        0.1712
% Retained                0.8237        0.7009
Leverage                  0.3759        0.5588
Cross-Industry            0.6447        0:6262
DEBT                      0.4893        0.3458
USE                       0.3942        0.4825
Overhang                  6.0641        5.3837
IBR                       0.9079        0.8462
Volatility                0.2036        0.1873
UP1                       0.0496        0.0385
DW1                       -0.0332       -0.0237
UP2                       0.0445        0.0498
DW2                       -0.0387       -0.0477

TABLE 2
Acquired COSO Dates and Time Frames
This table provides carve-out (CO), spin-off (SO) and
acquired (AQ) dates for 39 carve-out-spin-off (COSO)
combinations for the period from 1988 to 2012. Also, we
provide time frames from carve-out to spin-off (COSO) and
from spin-off to acquisition (SOAQ) and the names of
acquiring companies.

COSO                      CO Date       SO Date       AQ Date

First Miss Gold           5/18/88      10/20/95       5/27/99
Burlington Res.           7/8/88       12/30/88       3/31/06
Beckman Coulter           11/4/88       7/29/89       6/29/11
Santa Fe Energy Res.      3/9/90       12/12/90       8/29/00
El Paso Nat Gas Co        3/13/92       6/30/92       5/24/12
First Colony Corp         12/8/92       6/30/93      11/29/96
Dean Witter               2/23/93       6/30/93       5/30/97
Healthdyne Tech.          6/22/93       5/22/95       2/11/98
PacTel Corp               12/3/93       4/5/94        6/29/99
Santa Fe Pac. Gold        6/16/94       9/30/96       5/5/97
Guidant Corp             12/14/94       9/29/95       4/21/06
Nabisco Hldgs Inc         1/20/95       6/14/99      12/11/00
Union Pac Res Gp         10/11/95      10/15/96       7/14/00
Ascent Ent. Gp           12/13/95       6/27/97       6/8/00
Sterling Commerce         3/8/96        9/30/96       3/24/00
Lucent Tech               4/4/96        9/30/96      11/30/06
Associates First Cap.     5/8/96        4/7/98        12/1/00
Halter Marine Group       9/26/96       4/1/97        11/3/99
Sabre Gp Hldgs Inc       10/11/96       3/15/00       3/30/07
Metris Cos               10/25/96       9/25/98      11/30/05
Monterey Resources       11/14/96       7/25/97       11/4/97
ATL Products Inc          3/7/97       10/31/97       9/25/98
Priority Healthcare      10/24/97      12/31/98      10/14/05
Conoco Inc.              10/22/98       8/1/99        10/5/01
uBid Inc                  12/4/98       6/7/99        4/28/00
Retek                    11/18/99       6/2/00        4/11/05
Palm Inc                  3/2/00        7/27/00       6/30/10
AT&T Wireless             4/27/00       7/19/01       5/19/04
eFunds                    6/27/00      12/11/00       9/12/07
Stratos Lightwave         6/27/00       4/27/01       7/12/07
McDATA Corp               8/9/00        2/7/01        1/29/07
Agere Systems Inc         3/28/01       5/31/02       3/30/07
Reliant Resources         5/1/01        9/30/02      12/14/12
Mykrolis Corp             8/10/01       2/27/02       8/5/05
Travelers Pro Cas         3/22/02       8/20/02       5/30/97
Atlas America Inc         5/11/04       6/30/05       2/16/11
Freescale Semi            7/16/04       12/2/04       12/1/06
eCost.com Inc             8/27/04       4/12/05       1/31/06
Verigy                    6/13/06      10/31/06       7/6/11
                                      Mean (years)
                                      (Median-years)

                             COSO              SOAQ
COSO                        Period            Period

First Miss Gold              7.43              3.52
Burlington Res.              0.48              16.96
Beckman Coulter              0.73              21.61
Santa Fe Energy Res.         0.76              9.53
El Paso Nat Gas Co           0.30              18.52
First Colony Corp            0.56              3.11
Dean Witter                  0.35              3.69
Healthdyne Tech.             1.92              2.47
PacTel Corp                  0.34              5.07
Santa Fe Pac. Gold           2.29              0.19
Guidant Corp                 0.79              10.34
Nabisco Hldgs Inc            4.40              1.12
Union Pac Res Gp             1.01              3.47
Ascent Ent. Gp               1.54              2.77
Sterling Commerce            0.56              3.40
Lucent Tech                  0.49              9.51
Associates First Cap.        1.92              2.42
Halter Marine Group          0.51              2.16
Sabre Gp Hldgs Inc           3.43              6.75
Metris Cos                   1.92              6.90
Monterey Resources           0.69              0.18
ATL Products Inc             0.65              0.55
Priority Healthcare          1.19              6.56
Conoco Inc.                  0.78              11.42
uBid Inc                     0.51              0.69
Retek                        0.54              4.79
Palm Inc                     0.40              9.76
AT&T Wireless                1.23              2.58
eFunds                       0.46              6.67
Stratos Lightwave            0.83              6.05
McDATA Corp                  0.50              5.50
Agere Systems Inc            1.18              4.52
Reliant Resources            1.42              8.26
Mykrolis Corp                0.55              3.06
Travelers Pro Cas            0.41              1.33
Atlas America Inc            1.14              5.44
Freescale Semi               0.38              1.84
eCost.com Inc                0.62              0.58
Verigy                       0.38              6.26
                             1.17              5.63
                            (0.69)            (4.52)

COSO                           Acquirer

First Miss Gold               Placer Dome
Burlington Res.              Phillips Petr
Beckman Coulter                 Danaher
Santa Fe Energy Res.         Devon Energy
El Paso Nat Gas Co           Kinder Morgan
First Colony Corp            Genworth Fin
Dean Witter                 Morgan Stanley
Healthdyne Tech.              Respironics
PacTel Corp                    Vodaphone
Santa Fe Pac. Gold          Newmont Mining
Guidant Corp                  Boston Sci.
Nabisco Hldgs Inc             Kraft Foods
Union Pac Res Gp             Anadarlo Petr
Ascent Ent. Gp               Liberty Media
Sterling Commerce              SBC Comm
Lucent Tech                     Alcatel
Associates First Cap.          Citigroup
Halter Marine Group           Dresser Ind
Sabre Gp Hldgs Inc            Silver Lake
Metris Cos                     HSBC Fin
Monterey Resources              Texaco
ATL Products Inc             Quantum Corp
Priority Healthcare         Express Scripts
Conoco Inc.                 Conoco-Phillips
uBid Inc                     Cisco Systems
Retek                           Oracle
Palm Inc                    Hewlett-Packard
AT&T Wireless                     SBC
eFunds                  Fidelity Nat Info Serv.
Stratos Lightwave               Emerson
McDATA Corp             Brocade Communications
Agere Systems Inc              LSI Logic
Reliant Resources             NRG Energy
Mykrolis Corp                Entegris Inc
Travelers Pro Cas             St Paul Cos
Atlas America Inc               Chevron
Freescale Semi               Blackstone Gp
eCost.com Inc                  Daisytek
Verigy                       Avantest Com

TABLE 3
Carve-out Initial Returns

This table reports carve-out initial returns for combination
carve-out/spin-offs (COSOs) initiated during the pre- bubble
period, 1988-1998 (column 1); the bubble period, 1999-2000
(column 2); the post-bubble period, 2001- 2012 (column 3)
and the full period. 1988-2012 (column 4). The initial
returns are calculated from the offering price to first day
close. Daily stock returns are adjusted by subtracting the
contemporaneous returns for the CRSP equal-weighted index
(including distributions). The returns are regressed on
several independent variables: the log of offering size
(LSIZ); the percentage of the offering reinvested by the
issuer (USE); overhang, % retained by the parent / (1--%
retained); the CBOE Volatility Index (Volatility); EXO. a
dummy variable, where 1 = spin-off is an exchange offer and
0 otherwise; the ratio of the mid-point of the adjusted
filing range to the initial filing range where UP1 is
positive and zero otherwise; and the ratio of the offering
price to the mid-point of the final filing range where UP2
(DW2) is an increase (decrease) and zero otherwise,
(t-values are in parentheses.)

***, ** and * indicate significance at the 1%, 5% and 10%
levels, respectively.

Time Frame:       (1)           (2)           (3)           (4)
               1988-1998     1999-2000     2001-2012      Total
                                                          Period
Variable
N                 38            16            22            76
Mean            0.1356        0.5484        0.1083        0.2146
(Median)       (0,0660)      (0.2736)      (0.0702)      (0.0838)
LSIZ            -0.0741       -0.1093       -0.0171       -0.0568
               (-2.03) *      (-0.92)       (-0.96)      (2.04) **
USE             0.2893        0.6388        0.0502        0.1904
               (2.26) **     (2.00) *       (0.64)       (2.01) **
Volatility      1.6664        -7.1731       -0.9212       0.0592
               (1.80) *       (-1.85)     (-3.42) ***     (0.10)
EXO             0.0229        0.0845        0.1066        0.0096
                (0.16)        (0.24)        (1.17)        (0.09)
UP1             3.4417        0.9607        0.0264        0.8227
              (3.08) ***     (1.94) *       (0.15)      (3.04) ***
UP2             2.3325        -0.2379       3.8853        2.7234
                 (149)        (-0.15)     (5.18) ***    (4.33) ***
DW2             0.9707        4.6019        0.3929        0.9886
                (0.90)        (0.47)        (1.18)        (1.39)
F-value         3.03 **       3.61 **      10.93 ***     8.54 ***
Adjusted        0.2779        0.5492        0.7679        0.4132
  [R.sup.2]

TABLE 4
Returns from Carve-out to Spin-off

This table reports returns from the carve-out to the
spin-off for COSOs initiated during the pre-bubble period.
1988-1998 (column 1); the bubble period. 1999-2000 (column
2); the post-bubble period, 2001-2012 (column 3) and the
full period 1988-2012 (column 4). The 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 the carve-out offering size to
parent market capitalization (SIZR); a dummy variable if the
spin-off is announced prior to or concurrent with the
carve-out ex-date (AN); the percentage of the offering
reinvested by the issuer (USE); the CBOE Volatility Index
(Volatility); EXO. a dummy variable, where 1 = spin-off is
an exchange offer and 0 otherwise; the ratio of the
mid-point of the adjusted filing range to the initial filing
range where UP1 is positive and zero otherwise; and the
ratio of the offering price to the mid-point of the final
filing range where UP2 is an increase and zero otherwise,
(t-values are in parentheses.)

 ***, ** and * indicate significance at the 1%, 5% and 10%
levels, respectively.

Time Frame:             (1)               (2)
                     1988-1998         1999-2000
Variable
N                       38                16

Mean                  -0.0078           -0.0590

(Median)             (-0.0129)         (-0.0558)

SIZR                  -0.1033           -1.9313
                    (-2.26) **        (-3.52) **
AN                    0.0225            0.0077
                     (1.89) **         (0.16) *
SIC                   -0.0080           -0.0227
                      (-0.61)           (-0.39)
Volatility            0.1510            0.3749
                      (1.40)            (0.43)
EXO                   -0.0344           0.0094
                    (-2.09) **          (0.16)
UP1                   -0.4302           -0.2693
                    (-3.34) ***       (-2.81) **
DW1                   0.2778            1.3210
                     (2.16) **          (1.51)
UP2                   -0.0743           0.8210
                      (-0.41)          (2.44) *
DW2                   -0.1021           -0.8271
                      (-0.84)           (-1.51)
F-value               2.63 **           2.61 **

Adjusted              0.3063            0.5181
 [R.sup.2]

Time Frame:             (3)               (4)
                     2001-2012       Total Period
Variable
N                       22                76

Mean                  -0.0205           -0.0222

(Median)             (-0.0170)         (-0.0170)

SIZR                  -0.1156           -0.0925
                      (-1.00)           (-1.44)
AN                    -0.0340           -0.0014
                    (-3.10) **          (-0.11)
SIC                   -0.0139           -0.0191
                      (-1.08)           (-1.35)
Volatility            -0.1047           -0.0175
                      (-1.75)           (-0.19)
EXO                   -0.0132           -0.0075
                      (-0.55)           (-0.43)
UP1                   -0.1687           -0.1821
                    (-4.28) ***       (-4.22) ***
DW1                   0.0004            0.0324
                      (0.01)            (0.47)
UP2                   -0.0033           -0.1173
                      (-0.01)           (-1.13)
DW2                   0.1575            -0.0012
                     (2.16) *           (-0.01)
F-value              5.63 ***          3.31 ***

Adjusted              0.6877            0.2353
 [R.sup.2]

TABLE 5
Announced Versus Unannounced Spin-offs

This table contrasts results for carve-outs that announced a
follow-on spin-off before the carve-out ex-date over two
sets of results: for the carve-out ex-date returns with
announced spin-offs in column 1 and unannounced in column 2;
for the period from the carve-out to the spin-off, with
announced spin-offs in column 3 and unannounced in column 4.
The ex-date returns are calculated from the offering price
to first day close. The returns from carve-out to spin-off
are annually adjusted weekly returns. The 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 log of offering size (LSIZ); the ratio of the
carve- out offering size to parent market capitalization
(SIZR); the percentage of the offering reinvested by the
issuer (USE); the ratio of the mid-point of the adjusted
filing range to the initial filing range where UP1 (DW1) is
positive (negative) and zero otherwise; and the ratio of the
offering price to the mid-point of the final filing range
where UP2 (DW2) is an increase (decrease) and zero
otherwise; a dummy variable where 1 is a high investment
banker reputation variable (IBR. a modified Loughran and
Ritter (2004) rating of 8.0 or greater and 0 otherwise);
overhang, % retained by the parent / (1--% retained);
the CBOE Volatility Index (Volatility); the ratio of
long-term debt to parent market capitalization (leverage);
and EXO, a dummy variable, where 1 = spin-off is an exchange
offer and 0 otherwise.

***, ** and * indicate significance at the 1%, 5% and 10%
levels, respectively.

                   (1)           (2)           (3)           (4)

                                              Carve-out to Spin-off
               Carve-out Ex-date Returns         Period Returns

Variable       Announced     Unannounced   Announced     Unannounced
                Spin-Off      Spin-Off      Spin-Off      Spin-Off

N                  43            33            43            33
Mean             0.2578        0.1583        -0.0288       -0.0138
(Median)        (0.1028)      (0.0293)      (-0.0193)     (-0.0155)
LSIZ             -0.1146       -0.0263
               (-2.48) **      (-1.19)
SIZR                                         -0.1039       -0.1931
                                             (-1.24)     (-2.32) **
USE              0.1068        0.1313        -0.0448       -0.0066
                 (0.67)       (1.76) *      (-1.92) *      (-0.59)
UP1              1.1563        3.8589        -0.1530       -0.2088
                (2.86) **    (5.33) ***    (-3.03) ***   (-2.31) **
BUB              0.2517        0.4250        -0.0365       -0.0340
                 (1.30)      (3.97) ***      (1.65)      (-2.26) **
IBR                                          -0.0344       -0.0301
                                             (-0.99)      (-1.75) *
OVER             -0.0512       0.0080
                 (-1.60)       (1.46)
DW1              -0.0396       -0.1883
                 (-0.57)       (-0.44)
UP2              1.1552        3.5293
                 (1.09)      (3.44) ***
DW2              2.3079        0.0745
                 (1.58)        (0.15)
Volatility       -0.4946       -1.1644
                 (-0.44)       (-1.55)
LEV              -0.2934       -0.0126
                 (-1.38)       (-0.29)
EXO              -0.0857       (-0.29)
                 (-0.39)       -0.1233
F-value          3.37 **      14.51 ***     4.76 ***      3.69 ***
Adjusted         0.3834        0.8229        0.3091        0.2961
  [R.sup.2]

TABLE 6
Spin-off Ex-date Returns

This table reports spin-off ex-date returns of COSOs
initiated during the pre-bubble period, 1988-1998 (column
1); the bubble period, 1999-2000 (column 2); the post-bubble
period, 2001-2012 (column 3) and the full period 1988-2012
(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: a dummy
variable if the spin-off is announced prior to or concurrent
with the carve-out ex- date (AN); the percentage of the
offering reinvested by the issuer (USE); the OBOE Volatility
Index (Volatility); the ratio of the mid-point of the
adjusted filing range to the initial filing range where UP1
(DW1) is positive (negative) and zero otherwise; the ratio
of the offering price to the mid-point of the final filing
range where UP2 (DW2) is an increase (decrease) and zero
otherwise, (t-values are in parentheses.)

***, ** and * indicate significance at the 1%, 5% and 10%
levels, respectively

Time Frame:         (1)           (2)           (3)           (4)
                 1988-1998     1999-2000     2001-2012       Total
                                                            Period

Variable

N                   38            16            22            76

Mean              0.0027        0.0098        0.0023        0.0041

(Median)         (0.0034)      (0.0016)      (0.0040)      (0.0038)

AN                0.0016        0.0193        -0.0143       0.0031
                  (0.47)       (2.35) **      (-1.00)       (0.59)

USE               0.0057        0.0009        0.0273        0.0064
                  (1.38)        (0.11)        (1.44)        (1.04)

Volatility        0.0545        -0.2768       -0.1200       -0.0071
                 (1.77) *     (-2.49) **      (-1.56)       (-0.19)

UP1               -0.0386       -0.0384       -0.0693       -0.0446
                  (-1.04)     (-2.67) **      (-1.51)     (-2.57) **

DW1               -0.0373       -0.1323       -0.0100       -0.0230
                  (-1.00)       (-1.05)       (-0.21)       (-0.84)

UP2               -0.0500       0.0072        -0.3298       0.0003
                  (-0.99)       (0.14)        (-1.66)       (0.01)

DW2               0.0962        -0.1466       0.4686        0.1944
                (2.75) ***      (-1.65)     (4.76) ***    (4.37) ***

F-value           2.15 *        4.54 **       3.35 **      3.89 ***

Adjusted          0.1788        0.6229        0.4395        0.2125
  [R.sup.2]

TABLE 7
Summary Statistics by Event Type Versus Continuing COSOs

This table reports levels for COSOs by third event type:
Acquired (column 1). Bankruptcy (column 2) and Continuing
COSOs (column 3). Significant differences for the levels for
acquired and bankrupt and acquired and continuing are
reported in columns 4 and 5, respectively. First, we examine
four sets of returns: spin-off return, terminal event
announcement (TEA) return, carve-out to spin-off (CO to SO)
return and spin-off to terminal event (SO to TE) return.
Stock returns are adjusted by subtracting the
contemporaneous returns for the CRSP equal- weighted index
(including distributions). Next, we report the following
variables with significant differences below: the ratio of
long-term debt to parent market capitalization (leverage);
the percentage of the offering reinvested by the issuer
(USE); the percentage of the offering used to retire debt or
to pay dividends (DEBT); overhang, % retained by the parent
/ (1--% retained); the CBOE Volatility Index (Volatility);
the ratio of the mid-point of the adjusted filing range to
the initial filing range where DW1 is negative and zero
otherwise; and the time from spin- off to terminal event in
years (SOTE period), (t-values are in parentheses.)

Significance at the 10%, 5% and 1% levels is indicated by 1,
2 and 3 asterisks, respectively.-

                        (1)               (2)               (3)

                     Acquired         Bankruptcy        Continuing

N                       39                 9                28

Spin-off              -0.0042           0.0019            -0.0046
Return

TEA Return             0.0683            -0.1933           0.0012

COSO
Return                -0.0252           -0.0208           -0.0186

SOTE                  -0.0035           -0.0290           -0.0020
Return

USE                   0.5136            0.4411            0.2129

DEBT                  0.3364            0.5589            0.6800

DW1                   -0.0465           -0.0664           -0.0040

SOTE                  5.6295            3.6256            10.5996
period
(years)

                        (4)               (5)
                    Differences
                    Col. 1 & 2        Col. 1 & 3

N

Spin-off              -0.0061           0.0004
Return              (-4.06) **           -0.61

TEA Return
                      0.2616            0.0671
                     (2.99)**         (3.09) ***
COSO
Return                -0.0044           -0.0066
                    (-2.97) **          (-0.21)

SOTE                  0.0255            -0.0015
Return              (4.83) ***          (-0.42)

USE                   0.0725            0.3007
                       -0.72          (2.33) ***

DEBT                  -0.2225           -0.3436
                      (-1,48)         (-1.93) **

DW1                   0.0119            -0.0425
                       -0.36          (-1.97) **

SOTE                  2.0039            -4.9201
period              (3.10) ***        (-2.87) ***
(years)

TABLE 8
Regression Results--Terminal Event Announcement Period by
Type of Event Versus Continuing COSOs

This table reports COSO terminal event announcement returns
by type of event: Acquisitions (column 1), Bankruptcy
(column 2), Continuing COSOs (column 3) and Total Sample
(column 4). The stock returns are adjusted by subtracting
the contemporaneous returns for the CRSP equal-weighted
index (including distributions). The cumulative abnormal
returns are calculated for the period from one-day prior to
and including the spin-off announcement date. The
market-adjusted returns are regressed on several independent
variables: the ratio of the carve-out offering size to
parent market capitalization (SIZR); a dummy variable for
cross industry carve-outs (cross industry); a dummy variable
if the modified Loughran and Ritter (2004) investment banker
reputation variable represents high reputation, greater than
8.0 of 9.1 (IBR); the CBOE Volatility Index (Volatility);
leverage, the ratio of long-term debt to parent market
capitalization; and the ratio of the mid-point of the
adjusted filing range to the initial filing range where UP1
is positive and zero otherwise, (t-values are in
parentheses.)

***, ** and * indicate significance at the 1%. 5% and 10%
levels, respectively

                        (1)              (2)
Time Frame:          Acquistion       Bankruptcy

Variable
N                       39                 9

Mean                  0.0683            -0.1934

(Median)             (0.0512)          (-0.3321)

SIZR                  -0.0679           -1.4251
                      (-0.55)          (-3.13) *

Cross Industry        -0.0116           1.0685
                      (-0.37)         (14.66) ***

IBR                   0.0818            -3.2238
                     (1.61) *        (-15.70) ***

Volatility            0.5722            -0.7476
                     (2.13) **          (-2.86)

Leverage              0.0895            -0.1011
                    (3.74) ***          (-1.81)

UP1                   0.1807            6.8305
                     (2.42) **        (14.60) ***

F-value              4.88 ***         245.53 ***

Adjusted              0.3802            0.9946
  [R.sup.2]

                       (3)               (4)
Time Frame:         Continuing           Total

Variable
N                       28                76

Mean                  0.0118            0.0126

(Median)             (-0.0032)         (0.0008)

SIZR                  0.1363             0.309
                      (1.40)            (1.08)

Cross Industry        -0.0304           -0.0372
                    (-3.03) ***         (-0.64)

IBR                   0.0341            -0.1122
                     (1.81) *           (-1.14)

Volatility            -0.0206           -0.4965
                      (-0.38)           (-1.23)

Leverage              -0.0024           0.0981
                      (-0.16)          (2.01) **

UP1                   -0.1714           0.2857
                    (-2.33) **           -1.6

F-value               2.32 **          2.57 ***

Adjusted              0.2263            0.1117
  [R.sup.2]
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Author:Thompson, Thomas H.
Publication:Quarterly Journal of Finance and Accounting
Article Type:Statistical table
Date:Sep 22, 2014
Words:10238
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