The economic causes and consequences of corporate divestiture

✍ Scribed by Myeong-Hyeon Cho; Mark A. Cohen

• Publisher: John Wiley and Sons
• Year: 1997
• Tongue: English
• Weight: 96 KB
• Volume: 18
• Category: Article
• ISSN: 0143-6570
• DOI: 10.1002/(sici)1099-1468(199708)18:5<367::aid-mde831>3.0.co;2-4

✦ Synopsis

This study investigates economic causes and consequences of large corporate divestitures between 1983 and 1987. Prior empirical evidence suggests that ®rms hold on to poorly performing operating units for many years before divestiture. An agency-cost explanation for holding on to losers' has been proposed in the literature, as managers may be unwilling to admit they invested in inappropriate asset choices in the ®rst place. However, a puzzle still remains: why should such a manager ever sell off such a unit? We provide both a possible explanation and empirical evidence that suggests managers hold on to losers as long as they can blur' their poor performance under the cover of the remaining operating units of the ®rm. We ®nd that ®rms do not sell off poorly performing business units until the ®rm's other units experience signi®cant underperformance relative to their industry peers. Finally, although there is evidence that the stock market reacts favorably to divestitures, we ®nd that beyond the initial improvement, the ®rm's performance reverts back to its mean pre-divestiture level.