An Examination of Variables Associated With Divestment Decisions

Abstract

Many companies have divested portions of their operations. Previous studies have shown that certain divestitures tend to result in stock price increases; thus investors may benefit from a consideration of factors underlying the divestment process. This study draws from both wealth maximization theory and agency theory to obtain variables considered useful in modeling the divestment process. Logit analysis is used to model the decision process firms undertake when making divestment decisions and to test for differences between characteristics of divesting firms and those of other firms within the industry in which they primarily operate. Univariate tests are used in examining characteristics of divested units and how they differ from characteristics of nondivested units. Results indicate that divesting firms tend to be more diverse, larger, and earn lower returns than their competitors, and that divested units tend to earn lower returns on assets and exhibit lower revenue growth than do units not divested.