Long-term operating performance of European equity carve-outs

Abstract

This chapter analyses the long-term operating performance of European parent and subsidiary firms involved in an equity carve-out (ECO) in a multi-year window around the event, both in terms of growth (sales, EBIT, assets and capital expenditure) and profitability (return on assets, return on sales). Both parent and subsidiary firms grow stronger and are more profitable than benchmark companies in the year of the ECO, and are less profitable in the year following the ECO. The findings are similar to previous results on IPOs and SEOs, and a simple test of the level of abnormal accruals supports the hypothesis that firms manage their earnings. For parent firms, there is little evidence of positive abnormal operating performance in the second and third year following the ECO, casting doubt on the divestiture gains hypothesis, according to which the parent firm should experience an improvement in operating performance following the ECO. For subsidiary firms, there is some evidence that growth continues to be abnormally positive in the two years following the ECO, indicating that part of the stand-alone gains may be permanent.