Divestitures and Divisional Investment Policies
46 Pages Posted: 11 Mar 2003
Date Written: December 16, 2002
We study a sample of diversified firms that alter their organizational structure by divesting a business segment. These firms experience a reduction in the diversification discount after the divestiture. We show that the efficiency of segment investment increases substantially following the divestiture and that this improvement is associated with a decrease in the diversification discount. Our results support the corporate focus and financing hypotheses for corporate divestitures. We demonstrate that inefficient investment is partly responsible for the diversification discount and show that asset sales lead to an improvement in the efficiency of investment for remaining divisions.
Keywords: divestitures, diversification, asset sales, internal capital markets
JEL Classification: G31, G33, G34
Suggested Citation: Suggested Citation