The Impact of Formal and Informal Institutions on Stock Market Reactions to Divestment Announcements: A Meta-Analysis

Abstract

This study examines the impact of institutions and culture on stock market reactions to divestment announcements. We posit that divestment announcements in countries with stronger shareholder protection generate higher positive returns than divestments in countries with weaker shareholder protection. Furthermore, we contend that stock market reactions to divestment announcements are negative in countries with a long-term orientation culture or high corruption. A meta-analysis of 144 primary studies with 202 effect sizes and 90,449 firm-level observations is used to test our hypothesis. The results indicate that, in general, divestments result in a strong positive stock market reaction. Our findings suggest a positive moderation effect of a stable regulatory environment on the relationship between stock market reactions to divestments. While the stock market reactions to divestments are negative in countries with a long-term orientation culture, they are positive in the presence of external corruption.

Keywords: Divestments, stock market reactions, regulatory framework, long-term orientation, corruption

JEL Classification: F20, F23, G34, G38, M20, M16