Information Asymmetry and the Cost of Going Public for Equity Carve Outs

Steven D. Dolvin, Butler University
Karen M. Hogan
Gerad T. Olson

Abstract

We examine the relationship between asymmetric information and the cost of going public for equity carve-outs (ECOs) as compared to ordinary initial public offerings (IPOs). We decompose underpricing into the opportunity cost of issuance (OCI) and a measure of share retention. Compared to an average IPO, we find that ECOs have lower OCI and price revisions, but higher share retention and long-term returns. Compared to a matched sample of IPOs, however, we observe similar OCI and long-term returns, but still find ECOs have higher share retention. Our analysis suggests that documented pricing differences between ECOs and IPOs likely are attributable to the characteristics of ECO firms and not necessarily to status as a carve-out.