Perotti, Enrico and Rossetto, Silvia. (2007) Unlocking value: Equity carve outs as strategic real options. JOURNAL OF CORPORATE FINANCE, 13 (5). pp. 771-792. ISSN 0929-1199

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Abstract

Equity carve outs, the partial listing of a corporate subsidiary, appear to be transitory arrangements, usually dissolved within a few years by either a complete sale or a buy back. Why do firms perform expensive listings just to reverse them thereafter? We interpret carve outs of a production unit as strategic options to attract information from the market over its value as an independent entity. This improves the decision to exercise the option to sell out or to regain control. A listing is costly, as it reduces coordination of production, but generates valuable information from the market over the optimal allocation of ownership. We compute the optimal timing for the final sale or buy back decisions, the value of the strategic options embedded in the carve out and the optimal shares retained. The model explains the temporary nature of carve outs, and suggests an explanation for many empirical findings. In particular, it explains why carve outs are more common in highly uncertain sectors and in more informative markets. (c) 2007 Elsevier B.V. All rights reserved.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Journal or Publication Title:	JOURNAL OF CORPORATE FINANCE
Publisher:	ELSEVIER SCIENCE BV
ISSN:	0929-1199
Date:	December 2007
Volume:	13
Number:	5
Number of Pages:	22
Page Range:	pp. 771-792
Identification Number:	10.1016/j.jcorpfin.2007.03.007
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/30790

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