Empirical Tests of Corporate Restructuring and Divestitures

1. 12 Chapter Empirical Tests of Corporate Restructuring and Divestitures

2. Event Studies of Restructuring

3. Event Studies of Asset Sales

4. Sources of Wealth Gains • Studies of restructuring often find the larger the divestiture, the larger the announcement return • Asset sales: returns to buyer and seller likely represent efficient redeployment of assets • Information vs. Efficiency • Unsuccessful asset sales lose gains from announcement – Efficiency (Hite et al, 1987) • Wealth effects related to ratio of subsidiary to parent – Efficiency (Vijh, 2002) • Announcement causes negative stock returns to competitors – Efficiency (Hulburt et al, 2002)

5. Corporate Focus • Corporate focus possible source of gains: executives better able to monitor firm with narrow scope • Studies compare related and unrelated divestitures – usually using SIC codes (imperfect measure) • Some evidence that divestiture of unrelated subsidiaries (compared to related) had higher returns in 1980s vs. 1990s – corporate focus can’t explain all gains in divestitures

6. Event Studies of Relatedness

7. Corporate Focus • Focus, diversification, and firm value • Focus increased in 1980s – firm value also increased (but many alternative explanations) • Multi-segment firms tend to have lower values • Is there a diversification discount? • Difficult to measure link between focus and value • Difficult to quantify “diversification discount” • Acquisitions create wealth, but Graham et al (2002) found reduces excess value in combination – conclude methods of measuring conglomerate discounts must be reconsidered

8. Choice of Divestiture Methods • Spinoffs vs. asset sales – choice depends on tax implication and financial constraints • Spinoffs vs. equity carve-outs – firms choose carve-outs when subsidiary has more growth opportunities (parent often keeps stake long term) • Organizational choices balance cost of market transactions and cost of firm hierarchy