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Corporate Focusing and Internal Capital Markets

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  • Frederik P. Schlingemann
  • Rene M. Stulz
  • Ralph A. Walkling

Abstract

A sample of firms that focus by divesting at least one segment allows us to investigate the characteristics of segments divested as well as the nature of focusing firms. We find that firms are more likely to divest segments unrelated to the core activities of the firm and that the probability that a segment is divested is inversely related to its relative size within the firm. In fact, a segment's relative size is the variable that has the most explanatory power in predicting which segment a firm divests. We argue that this is consistent with the importance of asset market liquidity as a determinant of the divestiture decision. Financial constraints play an important role in determining which firms focus, which segments these firms divest, and in the market's reaction to divestiture announcements. Focusing firms perform less well and invest significantly less than heir non-focusing counterparts.

Suggested Citation

  • Frederik P. Schlingemann & Rene M. Stulz & Ralph A. Walkling, 1999. "Corporate Focusing and Internal Capital Markets," NBER Working Papers 7175, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7175
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    References listed on IDEAS

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    Cited by:

    1. Lamont, Owen A. & Polk, Christopher, 2002. "Does diversification destroy value? Evidence from the industry shocks," Journal of Financial Economics, Elsevier, vol. 63(1), pages 51-77, January.
    2. Rosellon Cifuentes, M.A., 1999. "Essays on financial policy, liquidation values and product markets," Other publications TiSEM 802f644e-3e93-4815-bf33-8, Tilburg University, School of Economics and Management.

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