Journal of Finance 1989

Management Buyouts of Divisions and Shareholder Wealth

Gailen L. Hite; Michael R. Vetsuypens¹

¹ Graduate School of Business, Columbia University and Edwin L. Cox School of Business, Southern Methodist University, respectively. The authors are grateful to Yakov Amihud, Bernard Black, Linda DeAngelo, Michael Jensen, Ron Masulis, David Mayers, Marcia Millon, Chris Muscarella, Clifford Smith, Nik

Abstract

This paper examines the wealth effects to parent company shareholders around the announcement of divisional management buyouts. Despite the relative absence of “arm's-length” bargaining between buyer and seller, there is no evidence that divisional management buyouts result in reductions in parent company share prices. Instead, small but statistically significant wealth gains are found during the two-day period surrounding the buyout announcement. This evidence suggests that divisional buyouts reallocate ownership of corporate assets to higher valued uses and that parent company stockholders share in the expected benefits of this change in ownership structure.

DOI

10.2307/2328618

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