Does Familiarity with Business Segments Affect CEOs' Divestment Decisions?

42 Pages Posted: 2 Mar 2007 Last revised: 21 Aug 2014

James S. Ang

Florida State University; Florida State University - College of Law

Abe de Jong

Erasmus University - Rotterdam School of Management

Marieke van der Poel

Erasmus University - Rotterdam School of Management

Date Written: July 18, 2014

Abstract

We examine the impact of familiarity with business segments on CEOs’ divestment decisions. We find CEOs are less likely to divest assets from familiar than from non-familiar segments. We attribute this effect to CEOs’ comparative information advantage with respect to familiar segments. Consistent with this information advantage, we document that the familiarity effect is particularly strong in R&D intensive industries. We further find the familiarity effect to be most pronounced for longer-tenured CEOs who have built up sufficient political power over the course of several years in office to enable implementation of their preferred divestment choices. We also document the value effects of divestments and show that familiarity affects returns on divestment announcements.

Keywords: Divestments, Familiarity, CEO work experience, CEO selection

JEL Classification: G34, D80

Suggested Citation

Ang , James S. and de Jong, Abe and van der Poel, Marieke, Does Familiarity with Business Segments Affect CEOs' Divestment Decisions? (July 18, 2014). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=967359 or http://dx.doi.org/10.2139/ssrn.967359

James S. Ang

Florida State University ( email )

College of Business
Tallahassee, FL 32306-1042
United States
904-644-8208 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Abe De Jong

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://web.eur.nl/fbk/dep/dep5/faculty/ajong

Marieke Van der Poel (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-43
Rotterdam, 3000 DR
Netherlands
+31 10 4081528 (Phone)
+31 10 4089017 (Fax)

HOME PAGE: http://www.rsm.nl/mvanderpoel

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