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On Corporate Divestiture

  • Hsiu-Lang Chen

    ()

  • Re-Jin Guo

    ()

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    This paper investigates why firms choose to divest their units/segments, and how firms choose among the three divestiture mechanisms (equity carveout, spinoff, and asset selloff). A direct comparison is conducted on firm’s viable choices on a comprehensive sample of corporate divestiture transactions in the period of 1985-1998. Our multinomial logit analysis provides a complete picture on corporate divestitures. We find that, in support for the focusing hypothesis, highly diversified firms are more likely to divest units when suffering from low operating efficiency. Our results are also consistent with the proposition that firms are divesting to relax their credit constraint, as firms with higher leverage ratios and low cash income are more likely to engage in carveouts or selloffs. We find limited evidence of information asymmetry as the major determinant of divestitures. We provide new findings on firm’s choice among the three divestiture options. We report that, conditioned on the decision to divest, firms mainly use asset selloffs in divesting smaller units operating in the same industry. Firms with larger divested units are more likely to use spinoff or carveout transactions. Parent firms having high revenue growth, high book-to-market ratio, and divesting unit when market sentiment is high are less likely to use spinoffs. Firms having high dividend yield, less information asymmetry, and divesting units operating in different industries are more likely to use carveout as an exit mechanism. Alternative specification of an ordered logit analysis generates consistent findings. Copyright Springer Science + Business Media, Inc. 2005

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    File URL: http://hdl.handle.net/10.1007/s11156-005-7020-z
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    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 24 (2005)
    Issue (Month): 4 (June)
    Pages: 399-421

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    Handle: RePEc:kap:rqfnac:v:24:y:2005:i:4:p:399-421
    Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102990

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    1. Tobias J. Moskowitz & Mark Grinblatt, 1999. "Do Industries Explain Momentum?," Journal of Finance, American Finance Association, vol. 54(4), pages 1249-1290, 08.
    2. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
    3. Anand M. Vijh, 2002. "The Positive Announcement-Period Returns of Equity Carveouts: Asymmetric Information or Divestiture Gains?," The Journal of Business, University of Chicago Press, vol. 75(1), pages 153-190, January.
    4. Daley, Lane & Mehrotra, Vikas & Sivakumar, Ranjini, 1997. "Corporate focus and value creation Evidence from spinoffs," Journal of Financial Economics, Elsevier, vol. 45(2), pages 257-281, August.
    5. Robert Gertner & Eric Powers & David Scharfstein, 2002. "Learning about Internal Capital Markets from Corporate Spin-offs," Journal of Finance, American Finance Association, vol. 57(6), pages 2479-2506, December.
    6. Rajan, Raghuram G & Servaes, Henri & Zingales, Luigi, 1998. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CEPR Discussion Papers 1801, C.E.P.R. Discussion Papers.
    7. Desai, Hemang & Jain, Prem C., 1999. "Firm performance and focus: long-run stock market performance following spinoffs," Journal of Financial Economics, Elsevier, vol. 54(1), pages 75-101, October.
    8. Nanda, Vikram, 1991. " On the Good News in Equity Carve-Outs," Journal of Finance, American Finance Association, vol. 46(5), pages 1717-37, December.
    9. Denis, David J. & Kruse, Timothy A., 2000. "Managerial discipline and corporate restructuring following performance declines," Journal of Financial Economics, Elsevier, vol. 55(3), pages 391-424, March.
    10. Maydew, Edward L. & Schipper, Katherine & Vincent, Linda, 1999. "The impact of taxes on the choice of divestiture method," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 117-150, December.
    11. Jeffrey W. Allen & John J. McConnell, 1998. "Equity Carve-Outs and Managerial Discretion," Journal of Finance, American Finance Association, vol. 53(1), pages 163-186, 02.
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