Value creation from financing in equity carve-outs: Evidence from Japan

• This paper examines Japanese equity carve-outs that focus on financing opportunities.
• The parent-financing hypothesis and the subsidiary-financing hypothesis are presented and tested.
• The Japanese stock market reacts positively when a parent company announces a carve-out.
• Parent companies with financial constraints tend to conduct carve-outs.
• Japanese equity carve-outs provide parent companies with debt reduction opportunities.

This study examines whether and how Japanese carve-outs enhance the wealth of their parent companies’ shareholders. In considering the differences between U.S. and Japanese carve-outs, this paper focuses on financing opportunities in carve-outs and tests the parent financing hypothesis and the subsidiary financing hypothesis.Through empirical analysis, this paper finds that the stock of a parent company reacts positively to a carve-out, and it especially reacts positively when the parent company is highly leveraged. In addition, parent companies apparently use funds from carve-outs to lower their leverage and continue to lower their leverage after carve-outs. Thus, the stock market may regard carve-outs as a trigger to reduce a parent company's leverage.