Divestitures, Who, What, Why and What Happens?

One of Joe's previous posts, The Power of Subtraction,  discussed the value that can be created by divestitures.  This leads to several interesting questions: Which firm divests?  When a firm divests, which division is sold?  What are the important factors in selecting that division?  How important are financial constraints in the divestiture process? And How well do divesting firms perform?  The abstract below describes a paper two colleagues and I wrote to analyze these issues. 

Asset Liquidity and Segment Divestitures

Frederick P. Schlingemann

University of Pittsburgh - Finance Group; Rotterdam School of Management (Erasmus University)

Ralph A. Walkling
Drexel University – Executive Director, Center for Corporate Governance, Lebow College of Business; Professor Emeritus, Ohio State University

Rene M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

      
Abstract:      
We investigate a sample of firms whose number of reported segments falls by one or more for the first time in their reporting history. The firms in our sample have a significantly larger diversification discount, underperform, and underinvest relative to comparable firms. Firms are more likely to divest segments from industries with a more liquid market for corporate assets, segments unrelated to the core activities of the firm, poorly performing segments, and small segments. The liquidity of the market for corporate assets plays an important role in explaining why some firms divest assets while others stop reporting them without divesting them, and why some firms divest core segments while others divest unrelated segments.

The final version is published in the Journal of Financial Economics.  A slightly earlier version of the complete paper can be downloaded here.

All the best,

Ralph