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Both inadequate governance and inappropriate strategy have been proposed as antecedents of the divestment activity of restructuring firms in the 1980s. We combined both views in a structural equation model in which divestment intensity is directly related to firm performance and strategy, which are in turn preceded by weak governance. Some supportive results indicate that blockholder equity, a governance antecedent, and relative product diversification (strategy) have important indirect effects on divestment activity and that relative product diversification and relative debt have important direct effects. Unpredicted findings concerning board outsider equity and components of divestment intensity emerged. Also, market performance mediates the relationship between accounting performance and divestiture intensity.
During the 1980s and into the 1990s, firms in many industries have shuffled their portfolios of assets, especially through divestiture (Bowman & Singh, 1993; Donaldson, 1991; Hoskisson & Turk, 1990). "Downscoping" (Hoskisson & Hitt, 1994) is a term recently coined to describe programs of strategic divestiture. Such activity is thus distinguished from downsizing, or strategically laying off employees during times of economic stress (Worrell, Davidson, & Sharma, 1991). The purpose of this study was to investigate the relationship between firm characteristics--governance, strategy, and performance--and high levels of divestment among downscoping firms. We defined divestment intensity as the level of total divestiture activity a firm undertakes during restructuring. We defined divestiture broadly, as including sales of assets, or "sell-offs," management buyouts of divisions, equity "carve-outs," and spinoffs. Because these divestitures are carried out within the context of portfolio restructuring (Bowman & Singh, 1993), not financial or capital structure restructuring, their antecedents may differ from those examined by previous work on divestments (Duhaime & Baird, 1987; Duhaime & Grant, 1984; Klein, 1986; Montgomery & Thomas, 1988; Montgomery, Thomas, & Kamath, 1984; Ravenscraft & Scherer, 1991), most of which concerns individual divestment events, not sets of divestitures carried out in the context of portfolio restructuring.
The research described in this article focused on such sets of divestitures by examining numbers of divestitures, total percentages of assets divested through downscoping, and the time required to complete restructuring. This research is related to the work of Markides (1992b), who examined the economic characteristics of firms that had significant changes in total diversification. The downscoping firms examined had to have signaled the investment...