Divestiture of prior acquisitions: competing explanations of performance
Document Type
Article
Publication Date
2-25-2020
Publication Title
Journal of Strategy and Management
Abstract
Purpose: There are multiple perspectives of divestiture and its performance that require reconciliation. While research finds a positive market response to divestment announcement, divestiture of prior acquisitions are generally viewed negatively. The purpose of this paper is to develop and empirically test different explanations for the divestment of prior acquisitions. Design/methodology/approach: This research employs event study to capture market reaction at acquisition announcement and subsequent divestments in a sample of 69 public US high-technology acquisitions between 2003 and 2008 that were divested by 2015. Only initial acquisitions involving public firms were included from the Thomson One Banker SDC database. Public press releases and companies’ SEC filings were reviewed to track divestitures back to prior acquisitions. Ordinary least squared regression was used to estimate coefficients. Findings: Results indicate a positive relation between acquisition and divestiture performance around announcement dates. This finding rejects the correction of mistake explanation, suggesting that a negative stigma surrounding divestments is largely unwarranted and that investors reward capable acquirer’s divestiture decisions. Practical implications: Investors do not treat all information signals at divestiture equally. For example, acquisitions made by larger and more profitable firms, or acquisitions paid for with stock, are associated with lower return upon divestiture announcement. Originality/value: This study finds that investors view divestiture as a proactive strategy, suggesting firms can improve performance by actively managing acquisitions and divestments to optimize their portfolio of businesses.
Department
Management, Marketing, and Logistics
Volume Number
13
Issue Number
1
First Page
33
Last Page
50
DOI
10.1108/JSMA-05-2019-0076
Recommended Citation
Amiri, S., S., King, D., DeMarie, S. (43886). Divestiture of prior acquisitions: competing explanations of performance. Journal of Strategy and Management, 13(1), 33-50.