The Impact of Divestment on Firm Performance: Empirical Evidence from a Panel of UK Companies

It has widely been suggested that during the 1980s many diversified firms narrowed the scope of their activities by refocusing on core businesses, primarily through divestment activity. This study examines the impact of divestment on firm performance, using an unbalanced panel of 132 UK quoted companies over the period 1985 to 1993. The results suggest that divestment has a positive, significant and substantial effect in raising the profitability of the vendor company. We find limited support for the view that the benefit from divestment is greater for larger and/or more diversified firms and firms operating with weak governance arrangements.     

The diffusion of foreign divestment from Burma

We examine variation in the rate of divestment by multinational firms from Burma. We argue that in addition to a set of firm‐level characteristics known to impact divestment decisions, firms are also influenced by characteristics of their home country and the divestment patterns of others. Using data on firms operating in Burma during 1996–2002, we model these multiple influences on firms to divest. Our results show that beyond firm‐level concerns, firms divest in response to the political characteristics of their home country, including protest, the level of political freedom, and transparency of institutions. We also find that the centrality of their home country in the network of intergovernmental organizations impacts divestment patterns in interesting ways. Copyright © 2013 John Wiley & Sons, Ltd.     

Asset divestment as a response to media attacks in stigmatized industries

In stigmatized industries characterized by social contestation, hostile audiences, and distancing between industry insiders and outsiders, firms facing media attacks follow different strategies from firms in uncontested industries. Because firms avoid publicizing their tainted‐sector membership, when threatened, they can respond by divesting assets from that industry. Our analyses of the arms industry demonstrate that media attacks on the focal firm and its peers both increase the likelihood of divestment for the focal firm. Specifically, attacks on the focal firm are the most consequential, followed by attacks on peers in the same industry subcategory, and by attacks on peers in different subcategories. These findings shed new light on divestment as a response to media attacks in stigmatized industries and lead us to rethink impression management theory. Copyright © 2014 John Wiley & Sons, Ltd.     

Real options in divestment alternatives

This paper examines the implications of real options theory for both the decision to divest a business unit and the mode of divestment. It is shown that the decision to divest a business unit and the decision to engage in staged modes of divestment are both sensitive to uncertainty, consistent with a real options logic. However, in the face of uncertainty, the results suggest that staged forms of governance create real options that are of lesser value as compared to simply not divesting a business unit and also as compared to completely divesting a business unit. Thus, this study shows that firms have real options of varied value to choose from in the context of divestments. Copyright © 2014 John Wiley & Sons, Ltd.     

Strategic redirection in large management buyouts: The evidence from post-buyout restructuring activity

This study examines the nature of post-transaction restructuring activities for 32 large U.S. corporations that underwent management buyouts between 1983–89. This study (i) provides evidence on the extent and type of divestment and acquisition activities under private ownership; (ii) documents the outcomes associated with MBOs and the longevity of the buyout organization; and (iii) investigates the claim that buyouts are primarily mechanisms for breaking up public corporations and selling the pieces to related acquirers. The balance of the evidence indicates that restoring strategic focus is an essential function of the buyout for these large firms. However, the evidence also indicates that the buyout organization does continue to operate significant parts of the prebuyout firm. By far the majority of firms continue to meet their debt obligations satisfactorily during the buyout phase. Finally, the evidence indicates that asset sales to related acquirers derive more from efficiency considerations than market power.     

Factors influencing divestment decision-making: Evidence from a field study

This research investigates factors which influenced the corporate-level divestment decisions of large, diversified firms. Field research, including interviews with corporate executives of 40 large diversified firms, provided the data to test propositions developed from various literature sources. In general, thefindings from this research indicate that a business unit's strength, its relationship to other units in its firm and its parent firm's financial position compared to its competitors are important divestment influences, whereas other factors such as general economic conditions are not. Some of the findings are consistent with conventional management wisdom, but others are counterintuitive.     

Firm performance,rent appropriation,and the strategic resource divestment capability

Dynamic capabilities manifest the organizational capacity to purposefully create or modify the firm's resource base. In this paper, we consider resource divestment an important firm‐level resource management capability that manifests a two‐step organizational change routine. Firms must first be motivated to engage in resource divestment, and then decide which resources should be ‘sold off.’ In exploring this firm‐level capability, we employ factor market theory to consider the ‘seller side’ of the market, and provide a useful framework for conceptualizing how firms generate competitive advantage through resource divestment. We test our model of the resource divestment capability with a dataset of professional baseball franchises during the period 1969–83. Copyright © 2007 John Wiley & Sons, Ltd.     

Reasons for corporate research and development spin‐outs – the chemical and pharmaceutical industry as example

The spin‐out of research and development (R&D) activities from established companies has increased during recent years. The reasons for realising corporate spin‐outs, especially regarding the involvement of financial investors, were investigated based on 30 European case studies within the chemical and pharmaceutical industry. The reasons can be categorised into two groups: an investment and a divestment rationale. Whereas the chemical industry uses both rationales, there are only divestment cases in the pharmaceutical industry. The investment cases within the chemical industry show that R&D spin‐outs can make an important contribution towards the flexibilisation and performance improvement of a company's internal R&D. The divestment cases show that R&D spin‐outs can be a suitable possibility to continue promising R&D activities. The survival rate of the analysed spin‐outs is high and numerous new jobs have been created in the past years, especially in pharmaceutical spin‐outs.     

Technology and Corporate Scope: Firm and Rival Innovation as Antecedents of Corporate Transactions

This paper studies the role of technological innovation as an antecedent of changes in corporate scope. It argues that technological innovations prompt the firm to reconfigure its corporate portfolio—to redeploy resources to areas of new opportunity while it divests out of marginal businesses. Results from a cross‐industry sample of U.S. manufacturing firms show successful innovation by a firm is followed by both expansion into new areas through complementary resource seeking acquisitions and divestment out of existing noncore businesses. This relationship is found to be moderated by the level of investible resources available to the firm, and supports the notion of scarce resources as a constraint on firm scope. In addition, firms are found to change their corporate scope in response to rival innovation. Copyright © 2011 John Wiley & Sons, Ltd.     

Are Losers Picked? An Empirical Analysis of Capacity Divestment and Production Reallocation in the Japanese Cement Industry

As demand in an industry shrinks, pressure for the reduction of capacity arises. A key issue is whether plants which, from an efficiency perspective, should reduce output in fact do so. Focusing on the Japanese cement industry, we examine whether less efficient plants reduce capacity. We find that less efficient firms are not more likely to reduce capacity than more efficient firms; however, less efficient plants within a multi‐plant firm are more likely to reduce capacity than more efficient plants. In addition, we find that this divestment pattern has led to a substantial drop in industry‐wide allocative efficiency.     

Closure and divestiture by foreign entrants: the impact of entry and post‐entry strategies

We analyze the longevity of foreign entrants explicitly considering two possible ways of exit: firm closure and capital divestiture. We find that entry and post‐entry strategies affect the longevity of firms and of foreign equity holdings, but in different manners. While the ownership arrangements and organizational structure affect the likelihood of divestment, they exert no significant effect upon closure. The entry mode exerts opposite effects on the two modes of exit, greenfield entrants being more likely to shutdown, but less likely to be divested. Only human capital affects closure and divestment in the same manner. Firms with large endowments of human capital are less likely to exit, irrespective of the exit mode considered. Copyright © 2000 John Wiley & Sons, Ltd.     

Patenting Activities and Firm Performance: Does Firm Size Matter?

Whereas prior research has provided valuable insights into the willingness of small and medium‐sized enterprises (SMEs) and large firms to engage in patenting, a comparison of the performance implications of patenting activities across small and large firms is still lacking. This gap is important because SMEs and large firms, having different resources and capabilities, might benefit from patenting activities in different ways. In particular, SMEs can be expected to benefit less from patenting activities in terms of protection against imitators than large firms. On the other hand, the propensity and ability of SMEs to license out their patents and generate additional revenue streams might be relatively higher than that of their large counterparts. This paper studies the impact of patenting on licensing, innovation, and financial performance for both SMEs and large firms, using multiple‐group path analyses on a sample of 358 manufacturing firms. Contrary to expectations, this study demonstrates that not only large firms, but also SMEs benefit from patenting in terms of commercializing product innovations. Moreover, for both SMEs and large firms, such increased innovation performance in turn contributes to higher profit margins. Patenting activities also increase the ability of SMEs and large firms to license out knowledge to external parties, and this positive effect is significantly stronger for large firms. However, neither in SMEs nor in large firms, these outward licensing activities generate short‐term financial benefits. Finally, the study demonstrates that patenting activities do not trigger significant cost disadvantages for either SMEs or large firms. Jointly, these findings provide unique insights in the value‐generating and cost‐increasing effects of patenting, suggesting that not only large firms, but also SMEs should consider patenting as a viable strategy to fully reap commercial benefits from their innovation activities. At the same time, they temper open innovation scholars’ expectations regarding the financial benefits of licensing out knowledge. Overall, these findings point to opportunities for optimizing the intellectual property management of both SMEs and large firms.     

Emerging Market Firms' Internationalization: How Do Firms' Inward Activities Affect Their Outward Activities?

Research summary : In this study we examine how an emerging market firm's inward international activities (“inward activities”) are related to its outward international activities (“outward activities”) by focusing on the role of the firm's gain from its inward activities. On the one hand, drawing upon the organizational learning perspective, we propose that a firm's gain from inward activities may facilitate its outward activities through improving its resource fungibility. On the other hand, we draw upon the prospect theory to propose that a firm's gain from inward activities may hinder its outward activities by discouraging the firm's top managers from taking risks that are inherent in outward activities. With detailed data from a sample of manufacturing firms in China, we find empirical support for both lines of arguments . Managerial summary : Are emerging market firms with higher inward gain more likely to engage in outward internationalization activities? We argue that it depends upon how a firm uses its gain from inward activities. If the firm can improve its resource fungibility (particularly organizational resource fungibility) from its inward gain, it is more likely to engage in outward activities. If the firm cannot improve its resource fungiblity, the answer is no. Our findings suggest that for emerging market firms, internationalization is not just a path toward new markets; instead, it reflects how these firms exploit and explore what they have learned from their interactions with foreign firms at home in foreign markets. Therefore, managers must think more strategically on developing (organizational) resource fungibility from their inward activities . Copyright © 2017 John Wiley & Sons, Ltd.     

AN EVOLUTIONARY PERSPECTIVE ON DIVERSIFICATION AND CORPORATE RESTRUCTURING: ENTRY,EXIT, AND ECONOMIC PERFORMANCE DURING 1981–89

This study proposes a theoretical perspective that firms engage in continuous search and selection activities in order to improve their knowledge base and thereby improve their performance. This general framework is applied to the context of corporate evolution. Entry and exit activities are understood as search and selection undertaken by the firm to improve their performance. One of the compelling features of this framework is that firms learn from their past entry experience and approach the next entry in a more focused and directed manner over time. Also, firms acquire additional knowledge from each entry event while applying their existing knowledge base. With a longitudinal (1981–89) data base on entry and exit activities of all publicly traded manufacturing firms in the United States, this study shows that applicability of the firm's knowledge base plays an important role in predicting which businesses a firm enters or exits. Firms sequentially enter businesses of similar human resource profiles and firms are more likely to divest lines of business of different profiles. Corporate-level analysis shows that such well-directed entry and exit contribute to the improvement of a firm's profitability.     

Does engagement in corporate social responsibility provide strategic insurance‐like effects?

Research summary : This study examines whether the stock and bond prices of firms engaging in corporate social responsibility (CSR) can benefit from insurance‐like effects during occurrences of negative events. Our results suggest that in the face of negative events, engagement in CSR on a continuous, long‐term basis provides insurance‐like effects on both the stock and bond prices of firms. Nevertheless, the effects are found to quickly disappear following the occurrence of a second, or subsequent, negative event. Although our results clearly indicate that firms need to allocate some of their available resources to long‐term strategic CSR activities, managers must also realize that in a crisis communication, they will probably be able to use their CSR claims on one occasion only. Managerial summary : The purpose of this article is to examine whether firms engaging in corporate social responsibility (CSR) can benefit from insurance‐like effects during occurrences of negative events. We find that on the occurrence of a negative event, long‐term CSR engagement does have insurance‐like effects. We also find that these insurance‐like effects may quickly disappear following the occurrence of a second negative event. Managers of firms with a long history of CSR activities need to realize that in a crisis communication, they can probably use their claims of adherence to CSR only once. Copyright © 2015 John Wiley & Sons, Ltd.     

Bundling digitized logistics activities and its performance implications

Bundling information technology (IT) applications to support logistics activities provides a means for firms to improve their logistics performance. Grounded in the logistics management and management information systems literature, as well as the resource-based view (RBV) of the firm, this study empirically: (i) investigates if there exist digitized logistics activities bundles in firms; and if so, (ii) explores the association between digitized logistics activities bundles and logistics performance of firms in terms of logistics cost and logistics service improvements. We surveyed 227 trading firms in Hong Kong and performed a factor analysis of the survey data, from which we identified three digitized logistics activities bundles and found the sample firms were clustered into four types based on the patterns of their digitized logistics activities. We then carried out a MANOVA on the data, the results of which show that different patterns of digitizing logistics activities are associated with different logistics performance outcomes. Specifically, firms with more extensive digitized logistics activities bundles and utilizing them more intensively achieve better logistics performance. Academic and managerial implications for digitizing logistics activities to improve logistics performance are discussed.     

Implementing the unrelated product strategy

There has been considerable debate over the viability of the unrelated product, or conglomerate strategy. The financial arguments for and against its viability are well known. However, the administrative imperatives for its successful implementation have not been well investigated. The paper argues that there are a number of critical administrative contingencies for successful implementation of this strategy which only a few unrelated product firms have recognized. These concern policies dealing with acquisition, divestment, portfolio structure, management and organization. The paper discusses each in turn, describing specific instances of success and failure to illustrate the major points of the argument.     

In search of El Dorado: The elusive financial returns on corporate political investments

Although many believe that companies' political activities improve their bottom line, empirical studies have not consistently borne this out. We investigate the relationship between corporate political activity (CPA) and financial returns on a set of 943 S&P 1500 firms between 1998 to 2008. We find that firms' political investments are negatively associated with market performance and cumulative political investments worsen both market and accounting performance. Firms placing former public officials on their boards experienced inferior market performance and similar accounting performance than firms without such board members. We find, however, that CPA is positively associated with market performance for firms in regulated industries. Our results challenge the profit‐maximizing assumptions underlying CPA research and focus on agency theory to better understand CPA. Copyright © 2012 John Wiley & Sons, Ltd.     

Making room to manoeuvre: How firms increase their influence with others in business networks

Earlier research has highlighted the dynamic nature of influencing in business networks, and shown that firms may vary considerably in their influence, defined as their potential to achieve changes in the activities, resources, or goals of other firms in the business network. There is, however, limited understanding of the specific means of influencing which may allow firms, over time, to increase their influence with other firms in the same network. Drawing on a longitudinal case study, we describe how a firm, through influencing others by the dynamic enactment of network management activities, gradually increased its influence with other firms in the business network. Based on our observations, we offer a processual model for influencing in business networks that links specific network management activities to conditions under which they are used.     

Firm and environmental influences on the mode and sequence of foreign research and development activities

This paper develops an explanation for the mode and sequence of entry that firms select for their international research and development activities. The hypotheses are based on the internalization and evolutionary theory perspectives. I first hypothesize that there is a sequence to the mode of foreign research and development activities initiated. I then discuss two firm capabilities and alternatives which might cause firms to omit parts of the sequence. The context of the study is the foreign research and development activities of incumbents and recent entrants to the Japanese pharmaceutical industry. The results indicate intriguing differences between the motivations of established firms and new entrants in establishing foreign research and development activities. © 1998 John Wiley & Sons, Ltd.