(1) Department of Accounting and Finance, Eastern Michigan University, 48197 Ypsilanti, MI;(2) Department of Finance, San Diego State University, 92182 San Diego, CA
Abstract:
We study the long-term performance of firms that divest assets to assess whether gains arise from reducing agency costs. We find that divesting firms underperform control firms before the divestiture and outperform control firms following the divestiture. The poor performance experienced by divesting firms is unrelated to managerial ownership, but the post-divestiture improvement in performance is strongly related to stock ownership by the CEO. The results support the argument that divestitures remove assets that generate negative synergies and that managerial ownership provides strong incentives to improve operations following the divestiture.
