The Long-Run Performance Comparison of Equity Carve-outs and Initial Public Offerings in Korea
Authors:   Asia-Europe Perspective Association, Kim Yong-Hyeon , Kim Nam-Gon 
Published: June 2018

Corporate restructuring activity has alternative mechanisms including spin-offs, sell-offs, and equity carve-outs. Spin-offs are stock dividends based on pro rata that distribute subsidiary firm’s ownership to existing stockholders of the parent firm. A spin-off creates a stand-alone public firm which is administratively and financially independent of the parent firm. Sell-offs are sales of divisions or subsidiary firms to the third party. A sell-off allows the parent to transform illiquid divisions or assets into cash and does not entail equity offerings. Equity carve-outs are public sale of unseasoned equity offerings of the subsidiary, and the offerings generate cash for the parent through a public sale of equity. Whereas spin-offs do not raise external funds and sell-offs do not involve any public securities issuance, equity carve-outs are initial public offerings of subsidiary equity. The purpose of this paper is to compare the long-run performance of equity carve-outs relative to matching initial public offerings following the offerings in the Korean stock market. No existing empirical studies except Prezas, Tarimcilar, and Vasudevan (2000) have analyzed the comparison. Moreover, while Prezas et al. (2000) examined the comparison using holding period returns only, this study compares the long-run performance using holding period returns as well as operating performance and Tobin’s Q.
The samples consist of 90 equity carve-outs and 789 initial public offering firms. The first proxy of long-run performance is stock returns. The buy-and-hold abnormal returns (BHAR) are defined as the buy-and-hold return of the ECO firms less the return of matching firms. The second proxy of long-run performance is operating performance. We follow the recommendation of Barber and Lyon (1996), who suggest that the ratio of earnings before interest, taxes, depreciation and amortization to total assets (EBITDA/TA) is an adequate proxy of operating performance. The abnormal operating performances are defined as the EBITDA/TA of the ECO firms less that of matching firms. The third proxy of long-run performance is Tobin’s Q. The abnormal Tobin’s Q is defined as the Tobin’s Q of the ECO firms less that of matching firms.
The empirical results are as follows. Firstly, the buy-and-hold returns of ECO firms show underperformance during the whole post-issuance years. The results are consistent with previous studies of underperformance during the three to five years subsequent to seasoned equity offerings. The buy-and-hold returns of IPO firms also report underperformance during the three years of post-issue period, which conforms to prior empirical studies. More importantly, the differences of long-run returns between ECO firms and IPO firms are not statistically significant. Secondly, both the operating performance of ECO firms and that of IPO firms show outperformance during the whole post-issuance years. The outperformance of operating performance are not consistent with underperformance of stock returns. The inconsistency could be explained by the fact that operating performance completely depends on firm’s management decisions, while stock returns are dependent upon investors in the stock market. More importantly, the differences of long-run operating performance between ECO firms and IPO firms are not significant. Thirdly, both the Tobin’s Q of ECOs and that of IPOs report outperformance during the whole post-issuance years, and the differences of Tobin’s Q between ECO firms and IPO firms are not statistically significant.