The announcement of the sale of equity in a wholly owned subsidiary of a corporation is received by the market as good news about the value of the existing equity in the parent corporation. This is in stark contrast to announcements of other forms of public equity financing . The authors show that the apparent inconsistency between the market response to equity carve-out announcements and other forms of equity financing can be easily understood in the Myers and Majluf (1984) framework. It is shown that firms that resort to an equity carve-out will be firms that, on average, are being undervalued by the market.

[When a security trades at multiple locations simultaneously, an informed trader has several avenues in which to exploit his private information. The greater the proportion of liquidity trading by "large" traders who can split their trades across markets, the larger is the correlation between volume in different markets and the smaller is the informativeness of prices. We show that one of the markets emerges as the dominant location for trading in that security. When informed traders can use their information for more than one trading period, the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations. Market makers, competing to offer the lowest cost of trading at their location, consequently deter informed trading by voluntarily making the price information public and by "cracking down" on insider trading.]

The announcement of the sale of equity in a wholly owned subsidiary of a corporation is received by the market as good news about the value of the existing equity in the parent corporation. This is in stark contrast to announcements of other forms of public equity financing. We show that the apparent inconsistency between the market response to equity carve‐out announcements and other forms of equity financing can be easily understood in the Myers and Majluf (1984) framework. It is shown that firms that resort to an equity carve‐out will be firms that, on average, are being undervalued by the market.

The announcement of the sale of equity in a wholly owned subsidiary of a corporation is received by the market as good news about the value of the existing equity in the parent corporation. This is in stark contrast to announcements of other forms of public equity financing. We show that the apparent inconsistency between the market response to equity carve-out announcements and other forms of equity financing can be easily understood in the Myers and Majluf (1984) framework. It is shown that firms that resort to an equity carve-out will be firms that, on average, are being undervalued by the market.

When a security trades at multiple locations simultaneously, an informed trader has several avenues in which to exploit his private information. The greater the proportion of liquidity trading by “large” traders who can split their trades across markets, the larger is the correlation between volume in different markets and the smaller is the informativeness of prices. We show that one of the markets emerges as the dominant location for trading in that security. When informed traders can use their information for more than one trading period, the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations. Market makers, competing to offer the lowest cost of trading at their location, consequently deter informed trading by voluntarily making the price information public and by “cracking down” on insider trading.