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The economic causes and consequences of corporate divestiture

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  • Myeong-Hyeon Cho

    (Korea University, Seoul, Korea)

  • Mark A. Cohen

    (Vanderbilt University, Nashville, USA)

Abstract

This study investigates economic causes and consequences of large corporate divestitures between 1983 and 1987. Prior empirical evidence suggests that firms 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 first 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 firm. We find that firms do not sell off poorly performing business units until the firm's other units experience significant underperformance relative to their industry peers. Finally, although there is evidence that the stock market reacts favorably to divestitures, we find that beyond the initial improvement, the firm's performance reverts back to its mean pre-divestiture level.© 1997 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 18 (1997)
Issue (Month): 5 ()
Pages: 367-374

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Handle: RePEc:wly:mgtdec:v:18:y:1997:i:5:p:367-374

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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Cited by:
  1. John Kwoka & Michael Pollitt & Sanem Sergici, 2010. "Divestiture policy and operating efficiency in U.S. electric power distribution," Journal of Regulatory Economics, Springer, Springer, vol. 38(1), pages 86-109, August.
  2. Panos Desyllas, 2009. "Improving performance through vertical disintegration: evidence from UK manufacturing firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 30(5), pages 307-324.
  3. Evžen Kocenda & Jan Hanousek, 2011. "Divide and Privatize: Firm Break-up and Performance," CESifo Working Paper Series 3465, CESifo Group Munich.
  4. Borland, Jeff & Lee, Leng & Macdonald, Robert D., 2011. "Escalation effects and the player draft in the AFL," Labour Economics, Elsevier, Elsevier, vol. 18(3), pages 371-380, June.
  5. Evžen Kočenda & Jan Hanousek, 2011. "Effect of the Czech Firms Break-Up on their Profitability and Productivity," Politická ekonomie, University of Economics, Prague, University of Economics, Prague, vol. 2011(5), pages 579-598.

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