Allocative efficiency of internal capital markets: Evidence from equity carve-outs by diversified firms |
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| Affiliation: | 1. Bayes Business School, City, University of London, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom;2. University of Greenwich, Old Royal Naval College, Park Row, London SE10 9LS, United Kingdom;3. Cranfield School of Management, Cranfield University, College Rd, Cranfield, Wharley End, Bedford MK43 0AL, United Kingdom;1. Department of Accounting and Finance, United Arab Emirates University, Al Ain, United Arab Emirates;2. School of Business and Law, Edith Cowan University, Joondalup, WA, Australia;3. Business School, University of Portsmouth, Portsmouth PO1 3DE, United Kingdom;4. Department of economics, University of Genoa, Italy |
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| 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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