The Pricing of Equity Carve-Outs

This article examines the pricing of stock for 251 equity carve‐outs during the 1986–1995 period. We document a mean initial‐day return of 5.83% and a mean one‐week return of 5.43%. Among carve‐outs, the initial underpricing is lower for issues represented by high prestige investment bankers and those that have a lower offer price. In comparison with 251 initial public offering (IPO) firms matched by size and book‐to‐market ratio of equity, carveouts exhibit significantly lower initial‐day returns, but their buy‐and‐hold returns for sixmonth and one‐year periods are not significantly different from IPOs. The IPO firms have a three‐year return of 28.82% which is significantly higher than the 21.07% return for the carve‐out firms.