Corporate divestiture and performance: an institutional view

In this study, we investigate how the institutional environment affects shareholders’ reaction to a firm’s announcement of divestitures. Traditionally, divestiture research has adhered to a financial economics perspective, in which shareholders anticipate certain economic outcomes from corporate divestitures and react accordingly. However, this research has not delivered a distinct understanding of the performance effects of corporate divestitures. To structure and integrate previous work, we apply a neo-institutional perspective of the stock market. We argue that at certain times, the institutional support for corporate diversification is relatively low. During these periods, there is a high rate of divestitures. The high divestiture activity legitimizes this corporate action and leads to a positive reaction of the stock market to new divestiture announcements. This means that individual evaluations of the possible performance outcomes of divestments are not the only factor determining the stock market reaction to a corporate divestiture announcement. Rather, investors might consider the perceived institutionalization of this corporate action when making their purchasing decisions. Using a meta-analytical technique, we find support for our prediction that different performance effects of divestitures, as revealed by previous studies, can be attributed to different conditions of the macro-economic environment. We discuss the implications of this result for research and management practice.