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Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms

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  • Vitkova, Valeriya
  • Tian, Siyang
  • Sudarsanam, Sudi

Abstract

We examine whether equity carve-outs (ECOs) lead to improvements in the functioning of the internal capital markets (ICM) of diversified firms. Divestitures, including spin-offs, sell-offs, and equity carve-outs, can be employed by firms to improve allocative efficiency. Equity carve-outs, unlike other forms of divestiture, leave the parent's ICM largely intact but provide the opportunity to enhance internal and external corporate governance mechanisms that can improve the parent's ICM. Using a US sample of 354 equity carve-outs completed between 1980 and 2013, we find that the allocative efficiency of parents is augmented significantly following transaction completion. This increase in allocative efficiency is driven by improvements in both the external and internal governance characteristics of parent companies, consistent with the expectation that motivates equity carve-outs.

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  • Vitkova, Valeriya & Tian, Siyang & Sudarsanam, Sudi, 2023. "Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms," International Review of Financial Analysis, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000169
    DOI: 10.1016/j.irfa.2023.102500
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    More about this item

    Keywords

    Internal capital markets; Equity carve-outs; Corporate governance; Investment efficiency; Diversified firms; Refocusing; Divestment; Propensity score matching; Endogeneity; Heckman Bias correction;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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