Managerial Expertise, Corporate Decisions and Firm Value: Evidence from Corporate Refocusing

59 Pages Posted: 19 Jan 2010 Last revised: 16 Dec 2014

See all articles by Sheng Huang

Sheng Huang

China Europe International Business School

Date Written: April 25, 2014

Abstract

This paper investigates how managerial expertise — specifically, industry expertise — affects firm value through divestiture. Using CEOs’ managerial experiences in industries throughout their careers as a measure of their industry expertise, I find that CEOs in diversified conglomerates are more likely to divest divisions in industries in which they have less experience. This finding is consistent with CEOs who divest such divisions in order to refocus on those divisions in which they have specialized — that is, to achieve a better match between their expertise and their firms’ retained assets. Firms that divest for a better CEO-firm match experience significant improvements in operating performance, as well as significant abnormal stock returns that persist for an average of three years following a divestiture. Further, among firms that divest for a better match, those firms with more experienced CEOs realize greater gains in firm value. In contrast, divestitures that increase corporate focus, but do not improve the expertise-asset match, do not lead to long-run increases in firm value.

Keywords: CEO characteristics, managerial expertise, refocus, diversification, divestiture

JEL Classification: G30, G34

Suggested Citation

Huang, Sheng, Managerial Expertise, Corporate Decisions and Firm Value: Evidence from Corporate Refocusing (April 25, 2014). Journal of Financial Intermediation 23, p348-375, 2014; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1537458 or http://dx.doi.org/10.2139/ssrn.1537458

Sheng Huang (Contact Author)

China Europe International Business School ( email )

Buidling 20, Zhongguancun Software Park
#8, Dongbeiwang West Road
Beijing, 100193
Singapore
86-10-82966804 (Phone)
86-10-82966888 (Fax)

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