Download This PaperForeign Divestment during Corporate Restructuring: Lessons from Agency Theory
37 Pages Posted: 26 Sep 2025
Abstract
This paper explores the role of agency problems in explaining MNEs’ foreign divestment decisions. In contrast to earlier work that relies on behavioral or experiential interpretations, we draw on agency theory, arguing that the well understood agency problem between owners and managers explains the timing of divestment decisions, in a manner hitherto unexplored. While managers often face disincentives to divest, making divestment less likely, corporate restructuring events provide opportunities for divestment that might otherwise be interpreted as managerial failure. Using data on foreign affiliates in Korea during 2007–2019, we find that factors that are likely to aggravate agency problems are negatively associated with the chance of affiliate divestment; we further find that MNE M&As moderate the relationship by weakening those effects. Specifically, large managerial commitments, such as majority ownership or direct headquarters control, decrease the chance of divestment by increasing managerial reputational risks. Strong MNE performance decreases the chance of divestment, as it grants managers greater agency. However, these effects are significantly weakened during firm-level M&A events, when information asymmetries increase and reputational scrutiny decreases, making divestment more feasible. Our findings support an agency theory perspective, highlighting how internal governance dynamics interact with organizational change to shape divestment decisions.
Keywords: Agency theory, Cross-border investments, Regional headquarters, Foreign affiliate divestment, Corporate restructuring
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Yunok Cho (Contact Author)
Southern Methodist University (SMU) - Strategy & Entrepreneurship Department
United States