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Which governance characteristics affect the incidence of divestitures in Australia?

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  • Pascal Nguyen
  • Nahid Rahman

Abstract

Event studies indicate that divestitures create shareholder value. However, managers are generally disinclined to execute a divestiture due to their inherent preferences for growing the firm’s assets. Governance structures can play a significant role in restraining this agency conflict. Using a sample of divestitures carried out by Australian firms over a recent 10-year period, we find that board compensation and ownership concentration increase the likelihood of a divestiture. In addition, board compensation has a stronger effect in firms that are more likely to divest, while larger boards inhibit divestitures in firms that are less likely to divest. Our analysis involves a propensity score matching method. We show that poor matching can lead to large biases and inconsistencies.

Suggested Citation

  • Pascal Nguyen & Nahid Rahman, 2015. "Which governance characteristics affect the incidence of divestitures in Australia?," Australian Journal of Management, Australian School of Business, vol. 40(2), pages 351-374, May.
    • Handle: RePEc:sae:ausman:v:40:y:2015:i:2:p:351-374
    DOI: 10.1177/0312896213517517
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    More about this item

    Keywords

    Agency conflicts; corporate governance; divestiture; matching; propensity score; restructuring;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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