The role of the seller’s stock performance in the market reaction to divestiture announcements

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: Divestitures have the potential to create shareholder value. However, the extent of the market reaction should depend on the likelihood of finding more valuable uses for the divested assets or the ability on the part of the seller to eliminate negative synergies. We hypothesize that strong performers have less scope to achieve substantial improvements compared to poorly performing firms. Using the seller's stock return in excess of the market return in the 1-year and 2-year periods preceding the divestiture announcement to expose the divesting firm's inefficient use of its assets, we show that the market reaction to divestiture announcements is significantly higher for underperforming firms. The difference in abnormal returns can be as high as 4 %. In contrast, none of the accounting-based variables that have been used in previous studies are found to be significantly related to the announcement returns. These results suggest that the firm's stock performance is a more useful indicator of the wealth effect associated with divestitures.

Keywords: Abnormal returns; Restructuring; Divestitures; Value creation; Firm performance (search for similar items in EconPapers)
Date: 2014-06-08
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Published in Journal of Economics and Finance, 2014, pp.1-22. ⟨10.1007/s12197-014-9289-z⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01370670

DOI: 10.1007/s12197-014-9289-z

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