This paper examines the innovative corporate structure of Thermo Electron Corporation which holds controlling interests in 11 units taken public in equity carve-outs. Carve-outs subject units of the company to the scrutiny of the capital markets, allow the compensation contracts of unit managers to be based on market performance, and shift capital acquisition and investment decisions from centralized control to unit managers. Thermo carve-outs substantially increase capital and R&D expenditures following carve-outs and generate significant value from their capital investments. Since the first carve-out in 1983, gains to shareholders have been substantially greater than industry and market benchmarks.

With a stochastic time change from calendar-time to information-time, we derive a parsimonious option pricing formula with stochastic volatility as a risk-neutral Poisson sum of Merton's (1973) prices over the option's information-time maturity domain. The formula contains two unobservable parameters, information arrival intensity and information-time asset volatility, with stochastic volatility induced by random information arrival. When the information arrival rate intensifies, the option price increases and vice-versa. We test the formula in pricing, hedging, and excess profits capture empirically using currency and the S&P 500 futures options transaction data.