Does CEOs' Familiarity with Business Segments Affect Their Divestment Decisions?

Abstract:     
We examine the impact of CEOs’ familiarity with business segments on their divestiture decisions. We find that CEOs are less likely to divest assets from familiar segments, when compared to non-familiar segments. Our evidence suggests that CEOs favor their familiar segments, because they are more informed about these segments relative to non-familiar segments. It does not support CEO selection and managerial entrenchment as main explanations for the familiarity effect. Even though divestitures from familiar segments are least likely to occur, these divestitures generate the highest abnormal announcement returns.

Number of Pages in PDF File: 49

Keywords: Familiarity, divestitures, internal capital markets, entrenchment, CEO selection

JEL Classification: G34, D80

working papers series