Round-Trip Wealth Effects

M&C Partners
5 min readNov 16, 2020


Most of the time, the market responds negatively when a corporation declares an acquisition. In a previous article, we reviewed a research that indicates a positive response when a company announces a sell-off. So, this makes one wonder: what is the net, round-trip wealth effect? In the present conversation, we will center on that and more.

In their research, Marquette and Williams went through 79 acquisitions, and 69 spin offs between the years 1980 to 1988. Their research focused on examining the shareholder’s round-trip wealth effects of the acquisition. And, of course, the subsequent spinoffs of the acquired entity.

Marquette and Williams tried to see if flips (paired acquisitions and sell-offs) generate on average positive or negative values. The flip is a terminology used mostly in real estate.

You can say that a merger and acquisition has a positive impact if the value was positive. However, their results did not actually indicate a positive or negative effect. The response was mostly neutral. Even though they found negative effects for acquisitions, and positive effects for sell-offs, the research ended up with combined effects that were not statistically significant.

Round-Trip Wealth Effects: The Exception

However, there was an interesting exception in their round-trip wealth effects research. When the target was an R&D, or a research and development intensive business, the net effect was positive. This is, of course, if there is evidence that the parent may have invested capital to fuel the target’s R&D needs.

Hypothetically speaking, we could think of this type of effect when a gigantic capital-filled conglomerate acquires a growing R&D-intensive business. In here, the parent has the authority to speed up the target’s growth.

On the other hand, if the parent company’s long-term plans don’t include the target, then the latter can be sold off at a larger value. This is in part based on the parent’s capital contributions during its reign as the owner of the target. And all the more persuading contention can be made for the advantages of monetary collaboration here.

Wealth Effects of Sell-Offs

The conviction that opposite cooperative energy may exist is another significant propelling variable for divestitures and side projects. As we have previously mentioned spin offs, equity carve outs and divestitures are basically the parent firm’s downsizing.

Thus, the more modest firm should be monetarily suitable without help from anyone else than as a portion of its parent organization. There are a few examination considers that have investigated the effect of side projects. They did so by examining the effect on the stock prices of both the parent company and the spin-off.

After that, they compare the effect and the market index. They do so to determine if the stocks experience abnormal performance that cannot be explained by the market movements alone.

In spinoffs, companies have the unique opportunity to analyze the effects of the separation. This is due to the fact that a market exists for both the stock of the parent company and the spin off. The research in the field of sell-offs presents a clear picture of benefits for shareholders.

Price Effects of Voluntary Sell-Offs

It is a given fact that there is a large body of research on the shareholder wealth effects of sell-offs on the selling company. There are also enough studies on the impact on buyers. It is enough to draw meaningful conclusions. Here are some of those round-trip wealth effects studies.

Effects of Sellers

Corporate sell offs show an increase in stockholder wealth. It has weighed an abnormal shareholder return of 1.2%. This data or statistic was derived from a large number of studies over a long period of time.

The equity market clearly and plainly concludes that the voluntary sling of a division is a positive development. This can lead to a heightened value of the association’s stock. There are a lot of great and intuitive explanations for the positive market reaction to sell-offs.

Effect of Buyers

It is also another given fact that the market is not keen on acquisitions most of the time. However, the market is more positive when it comes to acquiring a unit of another company.

Multiple research and studies have shown that the average abnormal return to buyers is also at 1.2%. However, it was also revealed that the Benou et al study heavily influenced the weighted average of the 1.2%. The study showed a 2.3% return.

A majority of the other studies showed returns between 0% and 1%. Nonetheless, the market seems to be positive about the unit acquisitions of other companies. Similar above, there are also a lot of intuitive explanations for both the seller and buyer round-trip wealth effects.

Corporate Governance and Sell-Offs

Most managers are reluctant to sell off a unit. Usually, the sell offs end up being an admission of mistakes. As we all know, managers are reluctant to admit these mistakes.

Between 1997 to 2005, Owen, Shi, and Yawson analyzed a sample of 797 divestitures. The research was consistent with other related research.

They found that divestitures created wealth. However, their most significant contribution to the research literature was to determine the role that corporate governance played in the divestiture decision. Additionally, they determined the magnitude of the positive round-trip wealth effects.

The research found that corporations with more independent boards had a greater positive shareholder wealth effects. The result was similar to companies with large blockholders.

Additionally, the research implies that the decision to divest needs more than the obvious recognition of poor performance on a unit or a poor fit of that unit within the overall company.

It was also heavily implied that management often needs pressure from independent directors. Or, from huge value holders for them to be adequately propelled to make the best choice.

In the US, this type of pressure has often come from hedge funds that acquire significant blocks of stocks. Their goal is to force value-increasing corporate restructuring.

However, in different countries such as the continental Europe, controlling shareholders may be less responsive to the concerns of small shareholders. These are smaller shareholders who oppose the company’s acquisition strategies and who do not want to pursue sell-offs that could release value to the shareholders.

© Image credits to Anni Roenkae