Subsidiary Divestiture and Acquisition in a Financial Crisis: Operational Focus, Financial Constraints, and Ownership

45 Pages Posted: 16 Mar 2006 Last revised: 9 Oct 2014

Yue Maggie Zhou

University of Michigan, Stephen M. Ross School of Business

Xiaoyang Li

Shanghai Jiao Tong University (SJTU)

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA; CEPR; IZA; CERGE-EI; University of Ljubljana

Date Written: September 1, 2010

Abstract

We exploit parent- and subsidiary-level data for publicly-listed firms in Thailand before, during, and after the 1997 Asian financial crisis to investigate the extent to which firms with different types of ownership restructure their business portfolios, in terms of divestitures and acquisitions. We compare restructuring choices made by firms mostly owned by (a) domestic individuals with block shares (family firms), (b) domestic firms and/or institutions (DI firms), and (c) foreign investors (foreign firms). We show that following the crisis (1) foreign firms’ restructuring behavior is the least affected; (2) domestic firms owned by families and domestic institutions (DI) behave similarly to one another; (3) domestic firms do not increase divestiture in their peripheral segments to improve operational focus or to obtain cash in a credit crunch; they actually reduce divestiture in core segments; (4) domestic firms also significantly reduce the acquisition of new subsidiaries. Our results challenge traditional explanations for divestiture such as corporate governance, operational refocus, and financial constraints. They indicate that in the great uncertainty of a crisis, domestic firms are able to hold onto their core assets to avoid fire-sale. In essence, they act more conservatively in churning their business portfolios.

Keywords: corporate restructuring, corporate governance, agency theory, economic crisis

Suggested Citation

Zhou, Yue Maggie and Li, Xiaoyang and Svejnar, Jan, Subsidiary Divestiture and Acquisition in a Financial Crisis: Operational Focus, Financial Constraints, and Ownership (September 1, 2010). Journal of Corporate Finance, Volume 17, Issue 2, April 2011, Pages 272–287.. Available at SSRN: https://ssrn.com/abstract=891852

Yue Maggie Zhou (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States

Xiaoyang Li

Shanghai Jiao Tong University (SJTU) ( email )

800 Dongchuan Rd
Minhang, Shanghai 200240
China

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA ( email )

420 West 118th Street
New York, NY 10027
United States

CEPR

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

IZA

P.O. Box 7240
Bonn, D-53072
Germany

CERGE-EI

P.O. Box 882
7 Politickych veznu
111 21 Prague 1, Prague
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

University of Ljubljana ( email )

Dunajska 104
Ljubljana, 1000
Slovenia

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