Divestitures and value creation: does leverage matter ?

Pascal Nguyen ()
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Pascal Nguyen: Axe 2 (2011-2016) : « Marchés, Cultures de consommation, Autonomie et Migrations » (MSHS Poitiers) - MSHS de Poitiers - Maison des sciences de l'homme et de la société de Poitiers - UP - Université de Poitiers = University of Poitiers - CNRS - Centre National de la Recherche Scientifique, UTS - University of Technology Sydney

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Abstract: This article evaluates the extent and sources of value associated with the divestitures of French firms over the period 1990 to 2010. The results show that excess returns are consistently higher when the divesting firm is highly levered. The market reaction is also stronger when the seller's return on assets and interest coverage ratio are low and when the seller is less focused. Using changes in the firm's fundamentals following the divestiture as proxy for market expectations at the announcement date, we find that excess returns are positively related to expected increases in focus, expected increases in the interest coverage ratio and expected decreases in leverage. These results indicate that investors recognize the benefits of divestitures and reevaluate the seller accordingly. However, they only hold for highly levered firms. In contrast, the market reaction to the divestitures announced by low-leverage firms does not appear to be related to the seller's fundamentals. This finding suggests that the determinants of value creation are not uniform across all firms.

Keywords: divestitures; value creation; wealth effect; efficiency; leverage (search for similar items in EconPapers)
Date: 2013
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Published in Applied Financial Economics, 2013, 23/2013 (14), pp.1145-1154. ⟨10.1080/09603107.2013.797558⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01368835

DOI: 10.1080/09603107.2013.797558

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