Abstract. 1. Introduction

Transcription

1 Asia-pacific Journal of Convergent Research Interchange Vol.4, No.1, March (2018), pp Abstract According to Modigliani and Miller(1958), the value of the firm is independent of the structure of its liability and equity. Modigliani and Millers's capital structure hypothesis suggests that the merger, acquisitions and divestiture could not affect the value of a firm. However, Jensen and Meckling(1976) suggest one reason why corporate divestitures might create wealth. If the divestitures better enable shareholders to monitor managerial performance, then the separation of a corporation can improve the efficiency of operations and thereby increase the combined value of the assets. This study deals with the knowledge information firm s corporate divestiture and the abnormal return and cumulative abnormal return of the knowledge information firm around the divestiture announcement day. The results suggest that investors should consider the complexity of the divestiture event on stock price and the implication for the companies planning for corporate divestitures. Keywords: Knowledge information firm, corporate divestitures, corporate restructuring, abnormal return 1. Introduction A corporate divestiture is a system in which all or part of the rights and duties of an existing company are transferred to one or more new companies and the stock is received in return. Business split can be used as one of the main strategies for rationalizing management in a rapidly changing business environment. It is to pursue business specialization by dividing specific business division of enterprise. Through this, companies can enhance competitiveness by maximizing management efficiency and strengthening core competencies. Managers will pursue the transition to a holding company through a corporate split. It is possible to pursue a transition to a holding company through corporate divestitures. Through this, companies can improve corporate governance and transparency of ownership structure. We can consider the three main forms of restructuring and divestitures: asset sales, equity carve-outs, and spin-offs. The term spin-off can be applied to a variety of transaction types, among which are: initial public offerings of the subsidiaries of publicly traded parents; carve-outs, the distribution of shareholders of a parent s remaining interest in a publicly-traded subsidiaries; split-offs, which involve the exchange of parent company Received(January 05, 2018), Review Result(1st: January 26, 2018, 2nd: February 20, 2018), Accepted(February 28, 2018) 1 Dept. Business Administration, Dongduk Women s Univ., Wolgok-dong, Sungbuk-gu, Seoul, 02748, Korea fencer@dongduk.ac.kr ISSN: APJCRI Copyright 2018 SoCoRI 63

2 stock by the stockholder for shares in a subsidiary. An asset sale is the sale of a division, subsidiary, product line, or other assets directly to another firm. The change in market expectations for the future value of a company will result in changes in share prices. In this paper, we analyze the stock price response to the split by focusing on the corporate split of the knowledge information company for business specialization. I examine whether the effect of split events on stock prices can be different according to industry and company by comparing the share price response with the stock market samples and the knowledge information company. The analysis results of this paper have the following meanings. First, The result of the analysis of each company belonging to different industry suggests that it is necessary to analyze by the industry and the enterprise in analyzing the effect of the corporate split on the stock price. Second, It is suggested that detailed analysis related to the industry-specific approach and segmentation is needed in analyzing the stock price influence of the corporate divestiture decision. Three, The conversion of a holding company through a corporate split is an important event that can be used to strengthen the dominance of the majority shareholder and to defend management rights. Therefore, the results of this study are expected to be helpful in establishing management strategies that utilize corporate divisions. 2. Literature Review According to Modigliani and Miller(1958), the value of the firm is independent of the structure of its liability and equity. Modigliani and Millers's capital structure hypothesis suggests that the merger, acquisitions and divestiture could not affect the value of a firm. However, Jensen and Meckling(1976) suggest one reason why corporate divestitures might create wealth. If the divestitures better enable shareholders to monitor managerial performance, then the separation of a corporation can improve the efficiency of operations and thereby increase the combined value of the assets. There is considerable evidence that spinoffs create values. Daley et al.(1997) test a prediction from the corporate focus literature that cross-industry spinoff distributions. Their results indicate significant value creation around the announcement of cross-industry spinoffs only. Maksimovic and Phillips(2001) argue that the choice to diversify is endogenous and that the discount reflects underlying firm characteristics that explain which firms diversify. Parrino(1997), however, finds a significant decline in the value of bonds following spinoff announcement. He concludes that the initial wealth transfer to shareholders was largely dissipated in litigation and other transaction costs. Gertner et al.(2002) examines the investment behavior of firms before and after they are spun off from their parent companies. They show that investment after the spinoff is significantly more sensitive to measures of investment opportunities that it is before the spinoff. 64 Copyright 2018 SoCoRI

3 Asia-pacific Journal of Convergent Research Interchange Vol.4, No.1, March (2018) Allen et al.(1995) evaluates the conjecture that excess stock returns that have been documented around the announcement of corporate spin-offs represent, at least in part, the re-creation of value destroyed at the time of an earlier acquisition. They evaluate this question with a sample of spin-offs that originated as earlier acquisitions. Brav and Gompers(1997) investigate the long-run underperformance of recent initial public offering firms in a sample of venture-backed IPOs and nonventure-backed IPOs. They find that venture-backed IPOs outperform nonventure-backed IPOs using equal weighted returns. Cusatis et al.(1993) investigate the value created through spinoffs by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. They find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Galai and Masulis(1976) consider a combined capital asset pricing model and option pricing model and apply the derivation of equity s value and its systematic risk. They develop the two models and present some newly found properties of the option pricing model. 3. Empirical Results Depending on the purpose of restructuring, divestitures can take some forms, such as spin-offs or equity carve-outs. A spin-off is the creation of an independent company through the sale or distribution of new shares of an existing business, and in an equity carve-out, the company sells some shares in its subsidiary to the public through an initial public offering. Unlike an spin-off, the company generally receives cash inflows through an equity carve-out. [Table 1] provides calendar dates of relevant events. The divestiture gives the existing shareholders new shares of the two new firms in proportion to their ownership. For the remaining company to obtain shares in the new company, it implements a tender offer based on a fixed exchange ratio according to a regulatory formula based on prevailing prices of the two firms. [Table 1] Calendar dates of relevant events Events Dates Divestiture Announce Divestiture Plan General shareholders meeting Trading stop Divestiture General meeting to report Registration of divestiture Change listing and resume listing ISSN: APJCRI Copyright 2018 SoCoRI 65

4 Foreign investors who net sold KRW235.5 billion in stocks between January and June 2013 turned to net buying of KRW15.1 billion after the divestiture decision passed the shareholders' meeting. This difference in supply and demand is interpreted as a result of the company's growth potential. If the combined value of the two split-off firms seems to increase after the split, the investment return can be achieved through the purchase strategy before the stop of trading [Fig. 1] Knowledge Information firm s AR and CAR AR CAR An event study is a statistical method to assess the impact of an event on the value of a firm. The announcement of a divestiture to two business entities can be analyzed to see whether investors believe the divestiture will create value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the market. If the divestiture improve managerial incentives or better enable shareholders to monitor managerial performance, then it can improve the efficiency of operations and increase the combined value of the assets. In case of using event study methodology, we analyze the stock price response by obtaining abnormal return and cumulative average excess return. In this study, I use market model. The abnormal return of firm i at time t is obtained as follows. where, R it : Firm i s Return at time t E(R it) : Firm i s Expected Return at time t 66 Copyright 2018 SoCoRI

5 Asia-pacific Journal of Convergent Research Interchange Vol.4, No.1, March (2018) The excess return on the day of the corporate split decision is 2.15%, and the cumulative excess return over the [-15,0] period is 10.57%. 7.05% for the [-15,1] period, and 6.61% for the [-15,2] period. [Table 2] AR and CAR Days AR CAR The analysis period in [Table 3] is from 2013 to 2016., [Table 3] AAR and CAAR Days AAR T-Value CAAR T-Value * * * ** ISSN: APJCRI Copyright 2018 SoCoRI 67

6 The knowledge Information firm is a remaining company and the split new company operates online and mobile game business. The split ratio is divided by the remaining company and the new company at a ratio of : The basis for calculating the divestiture ratio is based on the balance sheet of net assets as of the of 2012 and the book values of stocks. The mobile and online game markets are rapidly growing, entry barriers are low, and competitions increase. [Figure 2] shows the daily returns of a remaining company and a new company. The analysis period for stock returns is from January 2, 2013 to December 31, [Fig. 2] Daily returns of a remaining company and a new company When a time series has a unit root, the ordinary least squares estimator is not normally distributed. Dickey and Fuller(1979) studied the limiting distribution of autoregressive models for time series with a unit root. The null hypothesis is that there is an autoregressive unit root, and the alternative is, where is the autoregressive coefficient of the time series., The big O notation means that the set of values is stochastically bounded. That is, for any, there exists a finite and a finite such that, 68 Copyright 2018 SoCoRI

7 [Table 4] Augmented Dickey-Fuller Unit Root Tests Asia-pacific Journal of Convergent Research Interchange Vol.4, No.1, March (2018) Type Lags Rho Pr < Rho Tau Pr < Tau F Pr > F Zero Mean Single Mean < < < < < < Trend < < < The augmented Dickey-Fuller test adjusts for the serial correlation in the time series by adding lagged first differences to the autoregressive model, and indicates that the series have a difference-stationary process. Zero mean case: Single mean case: Intercept and deterministic time trend case: The reason for using Tau test statistics is to emphasize that the t distribution is not appropriate for computing p-values. The null hypothesis of the Granger causality test is that Group1 is influenced only by itself, and not by Group2. The causality test results show that the new company is influenced by itself and not by the remaining company, and vice versa. 4. Conclusion A corporate divestiture is a system in which all or part of the rights and duties of an existing company are transferred to one or more new companies and the stock is received in return. Jensen and Meckling(1976) suggest one reason why corporate divestitures might create wealth. If the divestitures better enable shareholders to monitor managerial performance, then the separation of a corporation can improve the efficiency of operations and thereby increase the combined value of the assets. Business split can be used as one of the main strategies for rationalizing management in a rapidly changing business environment. It is to pursue business specialization by dividing specific business division of enterprise. ISSN: APJCRI Copyright 2018 SoCoRI 69

8 Through this, companies can enhance competitiveness by maximizing management efficiency and strengthening core competencies. Managers will pursue the transition to a holding company through a corporate split. Through this, companies can improve corporate governance and transparency of ownership structure. This study deals with the knowledge information firm s corporate divestiture and the abnormal return and cumulative abnormal return of the knowledge information firm around the divestiture announcement day. The results suggest that investors should consider the complexity of the divestiture event on stock price and the implication for the companies planning for corporate divestitures. References [1] Allen, J., Lummer, S., McConnell, J., Reed, D., "Can takeover losses explain spin-off gains?", Journal of Financial and Quantitative Analysis, Vol.30 (1995), pp [2] Brav, Alon, and Paul Gompers, The long-run underperformance of initial public offerings, Journal of finance, 52(1997), pp [3] Dickey, David A, and Wayne A. Fuller, "Distribution of the estimators for autoregressive time series with a unit root", Journal of the American statistical assoc.(1979), 74, pp [4] Cusatis, Miles, Wooldridge, Restructuring through spinoffs, Journal of financial economics, 33(1993), pp [5] Daley, Lane, Viska Mehrotra, Ranjin Sivakumar Corporate focus and value creation evidence from spinoffs Journal of financial economics(1997), 45, pp [6] Galai, D. and R.W. Masulis, The option pricing model and the risk factor of stock, Journal of Financial Economics, Vol.3 (1976), pp [7] Gertner, Powers, Scharefstein, Learning about internal capital markets from corporate spin-offs, Journal of finance, 57 (2002), pp [8] Jensen, M. and Meckling, W., Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, Journal of Financial Economics, Vol.56 (1976), pp [9] Maksimovic, Vojis, and Gordon Phillips, Do conglomerate firms allocate resources efficiently?, Woprking paper, University of Maryland (2001). [10] Modigliani, F. and Miller, M.H., The Cost of Capital, Corporation Finance, and the Theory of Investment, American Economic Review, Vol.48 (1958), pp [11] Parrino, R., Spinoffs and wealth transfers: the Marriott case., Journal of financial economics (1997), 43, pp Copyright 2018 SoCoRI