C39 CN Tutorial 6 - Disposals and Divestitures.doc

Cusatis miles wooldridge 1993 similar findings to the

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Cusatis, Miles & Wooldridge (1993) Similar findings to the JP Morgan research Found that both the spinoffs and their parent companies showed positive abnormal returns for a period between 6 months – 36 months after the spinoffs Noticed both the spunoff entity and the parent were more active in takeovers than a control group Cusatis, Miles & Wooldridge (1993) Similar findings to the JP Morgan research Found that both the spinoffs and their parent companies showed positive abnormal returns for a period between 6 months – 36 months after the spinoffs Noticed both the spunoff entity and the parent were more active in takeovers than a control group 9. What reasons can be given for the almost universally positive results for the disposal of subsidiaries? Information – true value of subsidiary is often not clear to market and is held within overall corporate structure - Stock market prefers “pure plays Managerial Efficiency - Market may be saying it doubts management’s ability to manage larger and more diverse entities Focus on Core Businesses - Sale of Entenmann’s Bakery by Warner Lambert to General Foods (see case study later) - Sale of Sterling Drugs by Kodak Management Incentives - It may be easier to structure management incentives to more closely relate management performance with corporate performance Regulatory Factors - Regulated entities may be penalized by their association with a profitable larger parent
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- Foreign parent companies may spin-off subsidiaries so that they are not adversely affected by laws of the parent company
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