Divestitures and Divisional Investment Policies

Authors

  • Amy Dittmar,

  • Anil Shivdasani

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    • Dittmar is at the University of Michigan and Shivdasani is at the University of North Carolina. We thank John Graham, Richard Green, Eric Lie, Urs Peyer, Henri Servaes, Steve Slezak, Wanda Wallace, Marc Zenner, an anonymous referee, and seminar participants at Cornell University, Emory University, College of William and Mary, University of Michigan, and University of North Carolina for helpful comments.

ABSTRACT

We study a sample of diversified firms that alter their organizational structure by divesting a business segment. These firms experience a reduction in the diversification discount after the divestiture. We show that the efficiency of segment investment increases substantially following the divestiture and that this improvement is associated with a decrease in the diversification discount. Our results support the corporate focus and financing hypotheses for corporate divestitures. We demonstrate that inefficient investment is partly responsible for the diversification discount and show that asset sales lead to an improvement in the efficiency of investment for remaining divisions.

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