I investigate how a firm having decided to entirely divest its wholly owned subsidiary chooses among four prevalent divestiture alternatives, sell-offs, management buyouts, spin-offs, and equity carve-outs, by developing an infinitely repeated growth model in which the focus of the incentive-aligned parent managers is to divest the subsidiary for a best value. In the model, parent managers, subsidiary managers, and outside buyers hold differential information about the subsidiary's performance after restructuring. Besides the information differentiation, I posit that knowledge about the post-restructuring performance of the subsidiary may be explicit or tacit to different parties. Results of the analysis suggest that the nature of knowledge, the risk aversion of the three sides,...[ Read more ]

I investigate how a firm having decided to entirely divest its wholly owned subsidiary chooses among four prevalent divestiture alternatives, sell-offs, management buyouts, spin-offs, and equity carve-outs, by developing an infinitely repeated growth model in which the focus of the incentive-aligned parent managers is to divest the subsidiary for a best value. In the model, parent managers, subsidiary managers, and outside buyers hold differential information about the subsidiary's performance after restructuring. Besides the information differentiation, I posit that knowledge about the post-restructuring performance of the subsidiary may be explicit or tacit to different parties. Results of the analysis suggest that the nature of knowledge, the risk aversion of the three sides, and the discount factor of time preference influence the choice among the four divesting strategies. However, the post-restructuring growth prospect oftbe subsidiary is irrelevant to the choice. My model also generates implication on why the parent retains a majority ownership in the subsidiary when conducting an equity carve-out.