Core Abilities and Divestitures

Abstract

Over time, firms increasingly focus on their core competences. This evolution impairs their ability to manage noncore assets, which they should therefore divest. We test this prediction and find consistent evidence. Moreover, mature firms divest more in response to exogenous technology shocks. These results are induced by structural and process rigidities that firms accumulate over time to better exploit their core competences. Rather than reinvesting, mature divesting firms return money to investors. Finally, the market reaction to divestitures by older firms is positive and positively related to rigidities. These findings contribute to a better understanding of the corporate lifecycle.

Keywords: divestitures, corporate lifecycle, firm age, core competences, rigidities, technology shocks

JEL Classification: G30; L20