Corporate divestitures and family control

This paper investigates the relationship between divestitures and firm value in family firms. Using hand‐collected data on a sample of over 30,000 firm‐year observations, we find that family firms are less likely than non‐family firms to undertake divestitures, especially when these companies are managed by family rather than non‐family‐CEOs. However, we then establish that the divestitures undertaken by family firms, predominantly those run by family‐CEOs, are associated with higher post‐divestiture performance than their non‐family counterparts. These findings indicate that family firms may fail to fully exploit available economic opportunities, potentially because they pursue multiple objectives beyond the maximization of shareholder value. These results also elucidate how the characteristics of corporate owners and managers can influence the value that firms derive from their corporate strategies. Copyright © 2014 John Wiley & Sons, Ltd.     

Virtuous or vicious cycles? The role of divestitures as a complementary Penrose effect within resource‐based theory

Research summary: Studies of how divestitures affect firm performance offer mixed results. This paper unpacks relationships between divestitures and subsequent performance, focusing first on the moderating role of prior performance and then on mechanisms through which divestitures by higher‐ and lower‐performing firms affect performance. The study suggests that divestitures can exacerbate weakness and reinforce strength: divestitures by lower performers improve profits but inhibit sales growth and tend to speed the firms’ exits as independent actors; by contrast, higher‐performing divesters invest in support of existing assets and gain new growth, while avoiding becoming acquisition targets. Most generally, divestitures help reduce constraints to changing a firm's resource base, which we refer to as a complementary Penrose effect. Managerial summary: Divestitures help both struggling firms and high performers free financial and managerial resources that they can reinvest in more productive uses. In doing so, divestitures reinforce the strength of high performers but may exacerbate weaknesses of struggling firms. Divestitures by lower performers improve their profits but inhibit their sales growth and increase the chances that the firms will be acquired. By contrast, higher‐performing divesters gain new growth by investing in support of existing and recently acquired assets and, by doing so, are less likely to become targets of acquirers who seek their productive assets. Thus, divestiture is part of a downward cycle for struggling firms but supports a virtuous cycle for superior firms.     

Do Auctions and Forced Divestitures Increase Competition? Evidence for Retail Gasoline Markets

To foster competition, governments can intervene by auctioning licenses to operate, or by imposing divestitures. The Dutch government has done exactly that, organizing auctions to redistribute tenancy rights for highway gasoline stations and imposing divestitures of such stations on the four major companies. We evaluate this policy experiment and find that the auctioning of licenses without an obligation to divest has no discernible effect on prices. An obligation to divest lowers prices by 1.3–2.3% at divested sites. Moreover, prices decrease by 0.9–1.2% at sites nearby. This suggests that the observed price decreases are at least partly due to competitive spillovers.     

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.     

Activist‐impelled divestitures and shareholder value

Research Summary : This study analyzes how the divestitures that are impelled by activist investors in their campaigns against public corporations affect shareholder value. Using hand‐collected data on the activist campaigns that were launched against and the divestitures that were undertaken by Fortune 500 companies between 2007 and 2015, we find that activist‐impelled divestitures are more positively associated with immediate and longer‐term measures of shareholder value than comparable manager‐led divestitures. These performance differences persist for nearly two years after the completion of these deals. Our results empirically test the idea that firms with agency problems unlock shareholder value when they divest, and support the notion that activist investors fulfill an important external governance function. Our work also opens new research opportunities and offers practical implications as well. Managerial Summary : This study investigates how divestitures that are undertaken at the behest of activist investors affect shareholder value. We find that divestitures that were undertaken under pressure from activist investors are associated with more positive shareholder returns than comparable divestitures that were undertaken voluntarily by managers. These performance differences persist for nearly two years after the completion of these deals, alleviating concerns about the purported short‐termism of activist investors. Our findings suggest that activist investors may fulfill an important governance function by inducing managers to undertake strategies that they might not otherwise pursue, thereby unlocking shareholder value.     

De‐commitment to losing strategic action: evidence from the divestiture of poorly performing acquisitions

We use a mental accounting framework to study the conditions in which CEOs de‐commit to poorly performing acquisitions and so become more likely to divest them. We test this framework by contrasting the experiences of 68 firms that divested acquisitions with a control sample of 68 firms that did not divest their acquisitions. Consistent with the theory that we use to explain and predict de‐commitment, our results suggest that poorly performing acquired units tend to be divested when executives can place them within ‘attributional accounts’ (i.e., accounts for the cause of the performance that do not incriminate them) and ‘comprehensive accounts’ (i.e., within the context of overall firm performance). Copyright © 2006 John Wiley & Sons, Ltd.     

Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets

Many governments seek to impose gender equality on boards, but the consequences of doing so are not clear and could harm firms and economies. We shed light on this topic by conceptualizing the relationships as firm‐ and board‐specific and embedded within specific contexts. The theory is developed with reference to emerging markets, and tested on Malaysian firms. We find that female directors create value for some firms and decrease it for others. The impact varies across different performance indicators, firms' ownership, and boards' structure. The findings call for nuanced responses in relation to women's nominations from both governments and firms. Copyright © 2014 John Wiley & Sons, Ltd.     

An Empirical Analysis of the Relationship between Employee Ownership and Employment Stability in the US: 1999–2011

Do firms with employee ownership (EO) programs exhibit greater employment stability in the face of economic downturns? In particular, are firms with EO programs less likely to lay off workers during negative shocks? In this article, we examine the relationship between EO programs and employment stability in the United States using longitudinal Form 5500‐CompuStat matched data on the universe of publicly traded companies during 1999–2011. We examine how firms with EO programs weathered the recessions of 2001 and 2008 in terms of employment stability relative to firms without EO programs, and also whether such firms were less likely to lay off workers when faced with negative shocks more broadly. In our econometric analyses, we use a rich array of measures of EO at firms, including the presence of EO stock in pension plans, the presence of employee stock ownership plans (ESOPs), the value of EO stock per employee, the share of the firm owned by employees, the share of workers at the firm participating in EO and the share of workers at the firm participating in ESOPs. We also consider both economy‐wide negative shock measures (increases in the unemployment rate, declines in the employment‐to‐population ratio) and firm‐specific negative shock measures (declines in firm sales, declines in firm stock price). Our results indicate that EO firms exhibit greater employment stability in the face of economy‐wide and firm‐specific negative shocks.     

The impact of R&D‐specific factors on the attractiveness of small‐ and medium‐sized enterprises as partners vis‐à‐vis alliance formation in large emerging economies

This study examines the impact of research and development (R&D)‐specific factors in determining the likelihood of small‐ and medium‐sized enterprises (SMEs) from developed countries to be attractive partners vis‐à‐vis forming alliances with SMEs from large emerging economies (LEEs). This study is founded on the knowledge‐accessing theory of alliance formation, which emphasises the higher efficiency gains of knowledge application as opposed to knowledge generation. We extend this theory to SMEs on the basis that smaller firms, because of their resources constraints and drive to survive, are likely to use alliances to access external knowledge bases leading to new product development (NPD) opportunities because of the low feasibility of acquiring knowledge. As a mix of complex knowledge is necessary to develop most modern products and services, SMEs are also likely to adopt a more flexible operational approach and to accept compromises to forge knowledge‐accessing alliances. We illustrate this theoretical development using primary data collected from British and German biotechnology SMEs, declaring the intention prospectively to form alliances with their counterparts in Brazil. Binary logistic regression was used to identify the factors influencing the likelihood of a firm as an attractive alliance partner. Our results indicate that R&D‐specific factors influence the likelihood of firms to be attractive alliance partners. In particular, firms showing an in‐house innovation history focused on one or few products are more likely to be attractive alliance partners with LEE firms than those that do not. Another R&D‐specific predictor that enhances the chances of alliance partner attractiveness with LEE firms is the firm's focused searching and identifying capability relative to technology or equipment that demonstrates good prospects to improve the firm's line of products. A third predictor refers to the firm's awareness regarding non‐cost obstacles for its own technological development. Implications for policy makers and practitioners are also discussed.     

Do Train‐or‐Pay Schemes Really Increase Training Levels?

Reacting to perceived market failures leading to under‐optimal levels of firm‐sponsored training, governments all over the world have stepped in with various policy instruments to alleviate this problem, using incentives such as regulation or co‐financed schemes directed at firms or at individuals. Despite the widespread use of these schemes, rigorous empirical evaluation of such policies is uncommon. In this paper, we provide a careful evaluation of a reform in a train‐or‐pay scheme used in Canada that exempted medium‐sized workplace from the training requirement. Our identification strategy involves comparing changes in training levels in medium‐sized workplaces, before and after the reform, to changes for both smaller and larger workplaces. We also compare relative changes in training intensities to those observed in a neighboring province in which no such changes took place. We find the policy had no impact on training levels but caused firms to change their human capital investments portfolio, substituting informal and formal training.     

The choice among acquisitions,alliances, and divestitures

This paper investigates how firms choose among acquisitions, alliances, and divestitures when they decide to expand or contract their boundaries. The dataset covers 9276 deals announced and completed by 86 members of the Fortune 100 between 1990 and 2000. Our findings support explanations based on resources, transaction costs, internalization, organizational learning, social embeddedness, asymmetric information, and real options, and suggest that these theories are highly related and complementary. We find less consistent support for theories based on agency costs and asset indivisibilities. The strong role of firm attributes explains in part why firms may pre‐specify whether they will pursue acquisitions, alliances, or divestitures as part of their corporate strategies. Copyright © 2005 John Wiley & Sons, Ltd.     

Alleviating managerial dilemmas in human‐capital‐intensive firms through incentives: Evidence from M&A legal advisors

Research summary: We examine how human‐capital‐intensive firms deploy their human assets and how firm‐specific human capital interacts with incentives to influence this deployment. Our empirical context is the UK M&A legal market, where micro‐data enable us to observe the allocation of lawyers to M&A mandates under different incentive regimes. We find that law firms actively equalize the workload among their lawyers to seek efficiency gains, while “stretching” lawyers with high firm‐specific capital to a greater extent. However, lawyers with high firm‐specific capital also appear to influence the staffing process in their favor, leading to unbalanced allocations and less sharing of projects and clients. Paradoxically, law firms may adopt a seniority‐based rent‐sharing system that weakens individual incentives to mitigate the impact of incentive conflicts on resource deployment. Managerial summary: The study highlights the dilemmas when professional service firms allocate their key individuals to incoming projects, and the role that monetary incentives play in aggravating or alleviating these dilemmas. In the context of UK M&A law firms, we find that partners have a tendency to be attached to too many projects and not to share enough work, which is exacerbated when individual monetary incentives are stronger. Firms adopting a seniority based incentive system (lockstep system) are able to alleviate this effect. This implies that there is a trade‐off between rewarding personal performance versus balancing workloads and fostering collaboration among professionals. Copyright © 2015 John Wiley & Sons, Ltd.     

The contingent effects of political strategies on firm performance: A political network perspective

Research Summary: We examine the performance impact of corporate political strategies by analyzing the relationships among firms and various government institutions. While a firm's political connections to a focal government with decision‐making authority enhance performance, connections to a rival government competing with the focal government harm performance, particularly when the rivalry is intense. Firms can neutralize the negative effect from this political rivalry by using direct or indirect connections to a constraining government with power over the focal government. We find support for our conjectures based on an analysis of interactions among Chinese steel firms and the central and provincial governments in acquisition decisions during the industry's consolidation period of 1999–2010. Managerial Summary: Firms invest in political capital in order to influence public policies in their favor. However, the government is a not a monolithic entity and the relationships among various government institutions can alter and even reverse the effects of a firm's political strategy. This research shows that a firm's political connections can be both an asset and a liability. That is, although firms benefit from their connections to governments with decision‐making authority, they can be caught in the crossfire when there is a rivalry between governments. Furthermore, our research suggests that firms can cope with the negative impact from political rivalry by taking advantage of the structural relationships within the political system and influencing governments that have constraining power.     

The impact of technical consultants on the quality of their clients' products: Evidence from the Bordeaux wine industry

Research summary : Recent research rooted in the resource‐based view of the firm suggests that resources are more likely to create value if they are effectively managed. An underlying assumption of the literature is that firms manage their resources on their own. However, many firms hire consultants to help them do so. In this study, I develop and test hypotheses regarding the impact of technical consultants on the quality of their clients' products. Using data from the Bordeaux wine industry, I find evidence that the use of technical consultants has a positive impact on relative product quality and a negative impact on the extremeness of relative product quality. Moreover, the positive impact of technical consultants on relative product quality is stronger at lower levels of relative resource quality. Managerial summary : Findings from a study in the Bordeaux wine industry indicate that the decision to hire consultants should depend on a firm's strategy. If a firm wants to improve its performance, it should hire consultants. Indeed, the “best practices” of technical consultants are generally more valuable than internally generated knowledge. If a firm wants to achieve outstanding performance, hiring consultants may not be the right decision. Because the “best practices” of technical consultants have more certain performance implications than internally generated knowledge, they decrease the likelihood of extremely low performance. However, their lack of uniqueness also decreases the likelihood of extremely high performance. Finally, the decision to hire consultants should depend on the quality of a firm's resources. Firms with low‐quality resources tend to benefit more from the “best practices” of technical consultants. Copyright © 2016 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.     

A darker side of knowledge transfer following international acquisitions

We consider a knowledge flow that dominates the international acquisition context but can actually harm foreign acquired firms' performance: non–location‐specific knowledge transfer from acquirers to acquired firms (N‐LSKT). Considering its behavioral consequences, we argue that such knowledge transfer often may destabilize existing power structures in foreign acquired firms prompting conflict and power struggles, and as a result negatively affects their performance. We find support for this adverse knowledge transfer effect. Only at very high levels of N‐LSKT, when acquirers are likely to extend their own capabilities and associated power structures more completely, do the performance effects improve. Further, predeal success of acquirers and post‐deal functional integration amplify, while acquirers' strategic control over the acquired firm alleviates the generally negative effects of N‐LSKT. Copyright © 2015 John Wiley & Sons, Ltd.     

Firm non‐market capabilities and the effect of supranational institutional safeguards on the location choice of international investments

Research Summary : We investigate the extent to which firms rely on supranational institutional safeguards versus their non‐market capabilities to offset the risks of investing abroad. We argue that firms with non‐market capabilities are insensitive to supranational institutional safeguards when choosing the location of their international investments. We show that supranational agreements between an investor's home and host nation, operationalized as bilateral investment treaties (BITs), increase the likelihood of investment, but there is substantial firm heterogeneity with respect to this relationship. Firms with various forms of non‐market capabilities are not sensitive to BITs, whereas other firms are more likely to invest under BITs. We advance the understanding of how firm non‐market capabilities can substitute for supranational institutional arrangements in addressing risks associated with host country institutional weaknesses. Managerial Summary : The risk of expropriation is one of the main concerns companies have when investing abroad. Because of this, many countries implement bilateral investment treaties (BITs) to safeguard foreign investments, alleviate foreign investor concerns, and promote investments. We show that only those companies without political competence or political connections favor countries with BITs when choosing where to invest. Companies with political competence or political connections, on the other hand, ignore BITs and apparently rely on their ability to influence governments whenever their foreign investments face expropriation threats. As a result, politically connected or competent companies can enter markets most of their competitors lacking these capabilities shy away from. They can, therefore, do business in environments in which they face less competition.     

Learning to let go: Social influence,learning, and the abandonment of corporate venture capital practices

Research summary: This study examines the abandonment of organizational practices. We argue that firm choices in implementing practices affect how firms experience a practice and their subsequent likelihood of abandonment. We focus on utilization of the practice and staffing (i.e. career backgrounds of managers), as two important implementation choices that firms make. The findings demonstrate that practice utilization and staffing choices not only affect abandonment likelihood directly but also condition firms' susceptibility to pressures to abandon when social referents do. Our study contributes to diffusion research by examining practice abandonment—a relatively unexplored area in diffusion research—and by incorporating specific aspects of firms' post‐adoption choices into diffusion theory. Managerial summary: When do firms shut down practices? Prior research has shown that firms learn from the actions of other firms, both adopting and abandoning practices when their peers do. But unlike adoption decisions, abandonment decisions need to account for firms' own experiences with the practice. We study the abandonment of corporate venture capital (CVC) practices in the U.S. IT industry, which has experienced waves of adoption and abandonment. We find that firms that make more CVC investments are less likely to abandon the practice, and are less likely to learn vicariously from other firms' abandonment decisions, such that they are less likely to exit CVC when other firms do. Staffing choices also matter: hiring former venture capitalists makes firms less likely to abandon CVC practices, while hiring internally makes abandonment more likely. Plus, staffing choices affect how firms learn from the environment, as CVC managers pay attention to and learn more from the actions of firms that match their work backgrounds; i.e., firms that staff CVC units with former venture capitalists are more likely to follow exit decisions of VC firms, while those that staff with internal hires are more likely to follow their industry peers. Our results suggest that firms wanting to retain CVC practices should think carefully about the implementation choices they make, as they may be inadvertently sowing seeds of abandonment. Copyright © 2015 John Wiley & Sons, Ltd.     

Offshoring Pollution while Offshoring Production?

Research summary: We examine the role of firm strategy in the global effort to combat pollution. We find that U.S. plants release less toxic emissions when their parent firm imports more from low‐wage countries (LWCs). Consistent with the Pollution Haven Hypothesis, goods imported by U.S. firms from LWCs are in more pollution‐intensive industries. U.S. plants shift production to less pollution‐intensive industries, produce less waste, and spend less on pollution abatement when their parent imports more from LWCs. The negative impact of LWC imports on emissions is stronger for U.S. plants located in counties with greater institutional pressure for environmental performance, but weaker for more‐capable U.S. plants and firms. These results highlight the role of local institutions and firm capability in explaining firms' offshoring and environmental strategies. Managerial summary: Using confidential trade, production, and pollution data of more than 8,000 firms and 18,000 plants from the U.S. Census Bureau for years 1992–2009, we find that U.S. plants release less toxic emissions when their parent firm imports more from low‐wage countries (LWCs). In addition, goods imported by U.S. firms from LWCs are in more pollution‐intensive industries. U.S. plants shift production to less pollution‐intensive industries, produce less waste, and spend less on pollution abatement when their parent imports more from LWCs. However, not all U.S. firms choose to “offshore pollution.” U.S. plants located in counties with greater institutional pressure for environmental performance offshore more, but more‐capable U.S. plants and firms offshore less. Copyright © 2017 John Wiley & Sons, Ltd.     

Opportunity costs,industry dynamics,and corporate diversification: Evidence from the cardiovascular medical device industry, 1976–2004

This paper examines how demand conditions across alternative markets impact diversification decisions and firm performance by influencing the opportunity costs of deploying non‐scale free capabilities. Using data within the cardiovascular medical device industry, this study shows that: (1) firms with a larger stock of pre‐entry innovation experience are more likely to diversify; (2) firms in a current market with greater relative demand maturity are more likely to diversify; (3) diversification is associated with a performance decrease in the current market; and (4) diversification is associated with a performance increase at the corporate level. These findings shed new light on the self‐selection process of corporate scope, the conceptualization of firm capabilities, and the connection between industry dynamics and resource deployment. Copyright © 2013 John Wiley & Sons, Ltd.