Why are the Wealth Effects of UK Firms' Foreign Divestitures so Large?
27 Pages Posted: 6 Mar 2005
Date Written: March 2005
We study the short-run wealth effect of a sample of 165 foreign divestitures by UK firms 1986-1995. These foreign asset sales by UK firms lead to significantly positive shareholder wealth effects of some 4.8% over the 10 days before and after the announcement day, which are several times larger than the corresponding wealth effects reported for US firms. Our findings are robust to factors such as size, market to book, and GARCH effects. We make adjustments for possible thin trading effects and for cross-sectional dependence in abnormal returns but our results are qualitatively unchanged. We conclude that the wealth gains are primarily associated with an increase in geographical focus than with increases in industrial focus, which is commonly associated with domestic divestitures. We also conclude that the market reacts more favourably to sales of assets that are located in non Anglo-Saxon corporate governance regimes when compared to assets located in Anglo-Saxon regimes.
Keywords: International asset sales, industrial focus, geographical focus, corporate governance
JEL Classification: G14, G34
Suggested Citation: Suggested Citation