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- W317876479 abstract "This study investigated the price returns from 35 equity carve-out and 11 divesture initial public offerings (IPOs) over a 13 month period The findings based on this investigation suggest that the carve-out IPOs were found to be under-priced. This study also demonstrated that abnormal returns did occur for carve-outs and divesture initial public offerings. Also, it was found that the standard deviation on the returns increased for long term investors, suggesting a greater variability in returns and increased risk level for such investments. Introduction Initial Public Offering (IPO) refer to those stocks that a company sells to the public for the first time. Equity carve-out refer to a parent corporation creating and selling stock in a subsidiary to the public while keeping control. JPO carve-outs refer to these new issues of corporate subsidiaries that went public. JPO carve-outs, also known as IPO spin-offs, have started to become popular in the 1990' s and performance of the carve- out stocks has been strong, as noted by the Mergers & Acquisitions magazine (May /June 1993) the average returns for carve-outs for 1991 was 35.6% and 34.6% for 1992. Divestures use JPOs as a vehicle to sell businesses to the general rather than selling the business to large investors or corporations. Several studies seem to suggest that IPOs generate large short term if the stock is purchased at offer price. As for example, Ritter (1984) found that the mean return in JPOs purchased at offering price and sold at the first day close was 48.4% during the period and 16.3% during the period. Ritter defined hot issue market as a period where a large proportion of the firms going public have a high risk, and cold issue market where large proportion of the issues have low risk. In another study by Ibbotson (1975) it was seen that JPOs yielded an average return of 11.4% in the month following the offering for the period 1960 to 1969. Ibbotson reasoned that in order to compensate the large brokerage firms to bear the risk of selling new issues, the underwriter offers price discounts. Also, the new issues are riskier and the buyer expects a healthy return. In addition, the information asymmetry that surrounds the new issue makes the JPO even more risky and the buyer expects adequate compensation for their investment. Reilly (1977) studied the after market trading of JPOs and found that the new issues purchased in early after market and held for one year under performed market averages. Reilly seems to conclude that the new issues had higher betas (risk) than market index. Therefore, when the study was performed in the bear market period of 1973-1974, the returns on the new issues fell more than the loss registered by the market index. Rock (1982) suggested that the JPOs under pricing was caused by the uncertainty regarding the true value of the new stock. The informed investor (generally the large investor and/or institutional investor) is willing to bear the cost related to determining the true value of the share. If the issue is underpriced, the informed investor will purchase the stock, and it will trade at a higher price in the aftermarket. Another popular research topic was testing for aftermarket efficiency since it appears that underwriters offer new issues at a discount in order to sell the issues and reduce the risk of unsold inventory. This under pricing has no direct bearing on the true value of the shares. Studies performed by Fama (1965) and McDonald & Fisher (1969) confirmed the efficient market theory and that the stocks with large price increase in week one, subsequently performed no different than the average of the sample for period one week to end of year. Share price reaction to corporate spin-off1 announcements was examined by Miles and Rosenfeld (1993) who concluded that a 3% abnormal return was documented in a two day period from the announcement date on the Wall Street Journal. …" @default.
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- W317876479 title "Price Returns from Equity Carve-Out and Divesture Initial Public Offerings: A Longitudinal Study" @default.
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