On Corporate Divestiture

On Corporate Divestiture This paper investigates why firms choose to divest their units/segments, and how firms choose among the three divestiture mechanisms (equity carveout, spinoff, and asset selloff). A direct comparison is conducted on firm’s viable choices on a comprehensive sample of corporate divestiture transactions in the period of 1985-1998. Our multinomial logit analysis provides a complete picture on corporate divestitures. We find that, in support for the focusing hypothesis, highly diversified firms are more likely to divest units when suffering from low operating efficiency. Our results are also consistent with the proposition that firms are divesting to relax their credit constraint, as firms with higher leverage ratios and low cash income are more likely to engage in carveouts or selloffs. We find limited evidence of information asymmetry as the major determinant of divestitures. We provide new findings on firm’s choice among the three divestiture options. We report that, conditioned on the decision to divest, firms mainly use asset selloffs in divesting smaller units operating in the same industry. Firms with larger divested units are more likely to use spinoff or carveout transactions. Parent firms having high revenue growth, high book-to-market ratio, and divesting unit when market sentiment is high are less likely to use spinoffs. Firms having high dividend yield, less information asymmetry, and divesting units operating in different industries are more likely to use carveout as an exit mechanism. Alternative specification of an ordered logit analysis generates consistent findings. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals
Loading next page...
 
/lp/springer_journal/on-corporate-divestiture-c03RvHngti
Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2005 by Springer Science + Business Media, Inc.
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-005-7020-z
Publisher site
See Article on Publisher Site

Abstract

This paper investigates why firms choose to divest their units/segments, and how firms choose among the three divestiture mechanisms (equity carveout, spinoff, and asset selloff). A direct comparison is conducted on firm’s viable choices on a comprehensive sample of corporate divestiture transactions in the period of 1985-1998. Our multinomial logit analysis provides a complete picture on corporate divestitures. We find that, in support for the focusing hypothesis, highly diversified firms are more likely to divest units when suffering from low operating efficiency. Our results are also consistent with the proposition that firms are divesting to relax their credit constraint, as firms with higher leverage ratios and low cash income are more likely to engage in carveouts or selloffs. We find limited evidence of information asymmetry as the major determinant of divestitures. We provide new findings on firm’s choice among the three divestiture options. We report that, conditioned on the decision to divest, firms mainly use asset selloffs in divesting smaller units operating in the same industry. Firms with larger divested units are more likely to use spinoff or carveout transactions. Parent firms having high revenue growth, high book-to-market ratio, and divesting unit when market sentiment is high are less likely to use spinoffs. Firms having high dividend yield, less information asymmetry, and divesting units operating in different industries are more likely to use carveout as an exit mechanism. Alternative specification of an ordered logit analysis generates consistent findings.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 1, 2005

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

Monthly Plan

  • Read unlimited articles
  • Personalized recommendations
  • No expiration
  • Print 20 pages per month
  • 20% off on PDF purchases
  • Organize your research
  • Get updates on your journals and topic searches

$49/month

Start Free Trial

14-day Free Trial

Best Deal — 39% off

Annual Plan

  • All the features of the Professional Plan, but for 39% off!
  • Billed annually
  • No expiration
  • For the normal price of 10 articles elsewhere, you get one full year of unlimited access to articles.

$588

$360/year

billed annually
Start Free Trial

14-day Free Trial