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How and why corporate divestitures affect risk

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  • Jeff Madura
  • Maryna Murdock

Abstract

We find that in general, parents experience an increase in risk following divestitures, although the specific increase is conditioned on the form of divestiture and the type of proxy used to measure risk. The increase in risk following divestitures is generally higher for carve-outs than for asset sell-offs. The increase in risk in response to all forms of divestitures is more pronounced when parents eliminate related assets than when they eliminate unrelated assets, and when parents increase their financial leverage. Overall, our findings suggest that the shift in parent risk is associated with the remaining asset and liability structure of the parent. This implies that the parents have much control over the degree to which the divestiture will change their risk, based on the types of assets divested (whether related to parent's remaining assets), and the liability structure of units divested (the amount of debt that the parent transfers to the unit).

Suggested Citation

  • Jeff Madura & Maryna Murdock, 2012. "How and why corporate divestitures affect risk," Applied Financial Economics, Taylor & Francis Journals, vol. 22(22), pages 1919-1929, November.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:22:p:1919-1929
    DOI: 10.1080/09603107.2012.688937
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    Cited by:

    1. Song, Sangcheol, 2021. "Do in-network ties help in lowering subsidiary divestment rates under environmental challenges?," Journal of Business Research, Elsevier, vol. 128(C), pages 257-265.
    2. Sangcheol Song, 2014. "Subsidiary Divestment: The Role of Multinational Flexibility," Management International Review, Springer, vol. 54(1), pages 47-70, February.
    3. Sangcheol Song & Jeoung Yul Lee, 2017. "Relationship with Headquarters and Divestments of Foreign Subsidiaries: The Hysteresis Perspective," Management International Review, Springer, vol. 57(4), pages 545-570, August.

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