Capital Structure in Corporate Carve-outs

Abstract

A central question in corporate finance has been about the optimal balance between both debt and equity financing when trying to determine the optimal capital structure of a new or existing firm. In this thesis, I investigate how the capital structure of the parent and carve-out company evolve following the carve-out itself. This investigation is a direct extension of Dittmar's (2004) work and contributes to the literature on the choice of a carve-out or spin-off. This leverage choice may be influenced by the parent corporation's need for cash, either to finance growth opportunities, to distribute cash to shareholders, or to repay debt (Michaely & Shaw, 1995).

Using a sample of 102 subsidiaries that have completed a carve-out between the years of 1985 and 2001 , I find that carve-outs do not have higher debt levels than spinoffs as reported in Dittmar's (2004) study. I also find that the parent firms ' leverage does not decrease as predicted. Leverage actually increases during the three years following the carve-out. I have also found that cash constraints, collateral value, and the parent firms ' pre-debt level are positively related to leverage choice while the parent firms' precarve- out cash constraint is negatively correlated. However, there is no significance between leverage and firm size, growth opportunities, or profitability.

Notes

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Thesis Completion

2006

Semester

Spring

Advisor

Frye, Melissa

Degree

Bachelor of Science (B.S.)

College

College of Business Administration

Degree Program

Finance

Subjects

Business Administration -- Dissertations, Academic; Dissertations, Academic -- Business Administration

Format

Print

Identifier

DP0022112

Language

English

Access Status

Open Access

Length of Campus-only Access

None

Document Type

Honors in the Major Thesis

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