Divestitures as Good News or Bad News: The Role of Creditors and Management
Posted: 22 Aug 1998
We examine the interactive roles of creditors, CEOs, firm performance, and investment in intangibles on asset divestitures viewed by equity markets as "good news" or "bad news." Markets react more negatively to divestitures undertaken by firms with higher prior debt-equity ratios, and to firms with poor prior performance and higher R&D-intensity. Our evidence thus suggests that markets are, on average, wary of the effect of debt as "distress." However, CEO characteristics matter: debt signals "discipline" in the presence of more experienced and younger CEOs, and it signals "distress" with less experienced CEOs. The market's fears with bad news divestitures are borne out ex-post: such firms use divestiture proceeds to pay off creditors, and do so by lowering dividend payouts to equityholders and reducing R&D spending. Good news divestitures do not exhibit these features ex-post.
JEL Classification: G19
Suggested Citation: Suggested Citation