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Asian Review of Financial Research Vol.36 No.3 pp.85-103
Do Equity Carve-outs Harm Shareholder Interests? : A Cost-of-capital Perspective
Shu-Feng Wang 아주대학교 경영학과 부교수(Associate Professor, Business Administration, Ajou University)
Jaewon Choi* UIUC, 연세대학교 교수(Professor, University of Illinois Urbana-Champaign and Yonsei University)
Key Words : Spine-off,Carve-out,Initial public offering,Cashflow right,Minority shareholders


This paper investigates how the cashflow rights of a parent company's minority shareholders are affected by a subsidiary listing after a carve-out. It has been argued that the listing of a subsidiary may substantially dilute the cash flow rights of minority shareholders. However, this paper shows that minority shareholders might benefit from such carve-outs particularly when the cost of capital in the initial public offering (IPO) market is low. In a hot IPO market, issuing new shares through the subsidiary's listing may reduce the cost of finance for the parent's minority shareholders. In the counterfactual case where the same amount of funds was raised in seasoned equity offering (SEO) of the parent company, the dilution of minority shareholders' cash flow rights may be greater. In the example of LG Chemical, the cashflow rights of minority shareholders resulting from the IPO of LG Energy Solutions is 54% of LG Chemical, whereas raising the same amount of funds through a SEO without listing the subsidiary company would have resulted in only 46% cashflow rights, indicating that the cashflow rights would be greater in the case of subsidiary's IPO. Furthermore, the analysis of stock prices shows little evidence of negative impacts of the IPOs of subsidiaries on parent companies' stock prices. In fact, returns on the parent companies on the announcement of carve-outs or listings are often positive, and long-term stock prices do not indicate that subsidiary listings following carve-outs harm the interests of the minority shareholders. On the contrary, subsidiary listings following carve-outs may benefit the minority shareholders by reducing financing costs in a hot IPO market. Contrary to the recent criticisms against the IPO of LG Energy Solutions, our findings show that the IPO may have increased the cash flow rights of minority shareholders in LG Chemical.
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