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Abstract
This research examined the relationships existing between the divestiture of a portion of a company and the subsequent performance of the divesting company. Of additional interest was whether significant performance differences were exhibited by companies divesting for different reasons, changing diversification levels, and size of divestiture.
This study measured the effects of divestiture on the overall performance of the divesting company and the impact of the divestiture on the shareholders of the firm.
Overall company performance was measured by the profitability ratio, Return On Equity. Shareholder welfare was measured by the cumulative abnormal return to shareholders.
The research results support the contention that divestiture is an often used, unique, and important strategic option in the management of companies.
This research presents findings of interest with respect to the overall effectiveness of divestiture, the reasons for divestiture, and returns to shareholders. Little evidence was found that suggested the overall performance of companies improved after divestiture. The reasons given by companies for the divestiture had little effect on the subsequent performance of the firm. Change in diversification level demonstrated little impact on firm performance. The size of the divestiture (as a percentage of parent firm's total assets) had little effect on overall firm performance. The findings pertaining to shareholder wealth suggest that the stated reason for divestiture and the size of the divestiture do have significant effects on shareholder returns, but the diversification level does not.
