Study On The Motivations Of Equity Care-out

Equity carve-out is one of the important means for the capital market to optimize resource allocation,and it is conducive to broadening financing channels,improving corporate governance mechanisms,and obtaining reasonable market valuations.Carve-outs have been widely used in foreign countries,but due to the late and relatively immature development of the domestic capital market,equity carve-out has not been widely used in the domestic market.With the development of China’s capital market,companies have encountered negative synergy problems in the process of development and growth.There is an increasing demand for a shrinking resource integration method such as equity carve-out.In December 2019,the China Securities Regulatory Commission issued regulations on equity carve-out in domestic market of subsidiaries of listed companies,and as of September 2020,around 40 companies have expressed their intention to carve out;approximately one-third of these companies arc state-owned enterprises.Equity carve-out has become a hot topic in the past year.As a large central government-owned enterprise,China Railway Construction Co.,Ltd.is a pioneer on the equity carve-out road.On December 16,2015,China Railway Construction’s carve-out subsidiary,CRCC High-tech Equipment Co.,Ltd.was listed on the Hong Kong Stock Exchange,becoming the first carve-out case of an " A+H share" company.In December 2019,the day after the Securities Regulatory Commission issued domestic equity carve-out regulations.China Railway Construction declared that it would carve out another subsidiary,China Railway Construction Heavy Industry Co.,Ltd.,to be listed on the Sci-Tech Innovation Board,becoming the first to announce a domestic equity carve-out.Many central stated-owned companies also expressed their willingness to carve out later.China Railway Construction eagerness to engage in equity carve-outs and the motivations behind their decisions are worth exploring.Therefore,this thesis chooses the case of China Railway Construction’s carve-out of CRCC High-Tech Equipment as the research object,focusing on the motivations behind the carve-out and the realization of the motivations.The study on specific motivations is mainly based on the hypothesis of information asymmetry and divestiture gains.It is found that the motivations for China Railway Construction’s carve-out of CRCC High-tech Equipment are mainly to meet the investment and financing needs,implement the strategy of refocusing to help develop the core business of both the parent and subsidiary companies,and improve the brand recognition of parent and subsidiary companies,hoping to further develop overseas markets.Regarding the realization of these motivations,this thesis starts from the overall realization effect and uses the event study method to analyze the market reaction during the board announcement period,the announcement period of the China Securities Regulatory Commission,and the period of successful listing respectively.The results show that no matter what event window period it is,the market’s response to the carve-out event was not positive,and negative accumulated excess returns were obtained,which was inconsistent with the previous theoretical expectations.The overall realization effect of the motivations was not ideal,for several reasons.The first is that the subsidiary only accounts for a small part of the parent company in terms of asset size and profit level,so,the carve-out has less impact on the parent company.The second is because the main business of the subsidiary is to manufacture and sell large-scale road maintenance machinery,with China Railway Corporation and its subsidiaries as its single major customer.Since the business is highly related to the development of railways and the procurement plans of China Railway Corporation,the future performance of the subsidiary is uncertain and unstable,dependent on uncontrollable external factors.The third is because CRCC High-tech Equipment did not make full use of the advantages of listing,and did not implement any incentive policies,which is not conducive to the improvement of corporate governance.Subsequent companies that want to implement equity carve-out,especially large state-owned enterprises,can learn from the experience of China Railway Construction,When choosing a subsidiary to carve out,they should take full consideration the business features,development strategy,company size and other factors of the subsidiary,and make effective incentive strategies to further improve the company’s governance level and make full use of the advantages of equity carve-out.In addition,listed companies can now choose to carve out domestically.The listing location of the carved-out subsidiary is also a factor that needs to be considered during the equity carve-out.Overseas listing is indeed conducive to absorbing international capital and expanding certain overseas markets.