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Divestitures, wealth effects and corporate governance


  • We thank an anonymous referee and Robert Faff (the editor) for helpful comments and suggestions. Thanks are also due to Ron Masulis, colleagues in the School of Banking and Finance at the University of New South Wales, especially Jo-Ann Suchard and Kathryn Wong for helpful comments and suggestions. Further we are grateful to Janice How, Peter Verhoeven, Paul Frijters and Benno Torgler at QUT and Richard Heaney, Timothy Fry and Michael Graham at RMIT, delegates at the 20th Australasian Banking and Finance conference and delegates at the 2009 Asian Finance Association conference, in particular Larelle Chapple and Sudipto Dasgupta for yet more helpful comments and suggestions. Excellent research assistance provided by Rahul Anand is also acknowledged.


We analyse the market reaction to divestiture decisions and determine the impact of corporate governance practices. We find the market reaction is significant and can be determined using internal governance mechanisms. We evaluate the determinants of the decision to sell using a control sample of firms displaying characteristics often associated with divestitures indicating that these firms may face the same incentives to divest but elect not to restructure in this manner. Our results suggest that a combination of strong internal and external governance may force managers to act in a manner that is incompatible with their personal desires.

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