To Live or Let Die: An Empirical Analysis of Piecemeal Voluntary Corporate Liquidations, 1971-1991
Posted: 10 Oct 1998
This paper presents the results of an in-depth investigation of 61 publicly-traded firms that chose to liquidate voluntarily over the period 1970 through 1991. In comparison with a size-matched sample of industry peers, firms that elect to liquidate voluntarily are characterized by lower Tobin's Q (as measured by the market-to-book value of the firm), a higher percentage of equity ownership by management and members of the board of directors, and a higher incidence of a member of the corporation's founding family on the board. These firms are also characterized by a higher incidence of asset sales and prior attempts to transfer control of the firm by other means, including merger and proxy fights, than their industry counterparts. The average stock return around announcements regarding the liquidation decisions is roughly +20% and statistically significantly different from zero. These results suggest that firms that make the value enhancing decision voluntarily liquidate confront low future growth opportunities (i.e., low Tobin's Q), but, the absence of future growth opportunities is not sufficient to bring about this decision. Rather, it is also necessary that decision makers have a vested interest in the outcome, either because of their ownership stake or because of their family affiliation with the business. We interpret the results to be consistent with managerial theories of the firm which posit that managers are more likely to act in shareholders' interests when managers have a significant personal stake in the firm.
JEL Classification: D21
Suggested Citation: Suggested Citation