Antecedents and Consequences of Divestments

Aseem Kaul (aseemk@wharton.upenn.edu)

Management Department

Wharton School, University of Pennsylvania

My research project examines the antecedents and consequences of firm divestment. I begin by examining the effect of three hitherto underexamined factors on the firm's decision to divest: market sentiment around firm performance, industry conditions and the quality and scope of firm innovation. I hypothesize that firms will be more likely to divest when they face pressure from the stock market and when such pressure is associated with managerial entrenchment; that firms will time their divestments to coincide with industry expansion to benefit from higher valuations; and that divestment will be positively related to firm innovation focus. In addition, I develop hypotheses about how these factors will effect the direction of divestment, in particular, whether firms will choose to divest core or peripheral assets.  These hypotheses are tested on a panel of US manufacturing firms and the results show support for the theoretical predictions.

Having examined the antecedents of firm divestment, I then turn to look at the consequences of these transactions. Here, I not only examine the performance of divesting parents as measured by short-term abnormal returns (the measure traditionally used in the literature), but also look at the long-term consequences of divestment, both on the stock market performance of the firm over time as well on firm innovation and R&D. I take a contingency approach to these outcomes, hypothesizing that post-divestment performance will be a function of both the antecedent conditions leading up to the divestment, as well as the nature of the business sold.

Overall, I hope to contribute to the literature on corporate strategy and divestment by examining the effect that external factors - such as stock market pressure and industry cycles - have on firm divestments, as well as the role that governance mechanisms play in mediating these effects. I also hope to look more closely at the relationship between firm divestments and R&D outcomes, thus bridging the literature on corporate scope and that on firm innovation.