Academic journal article The International Journal of Business and Finance Research

Impact of Divestiture Activities on Corporate Performance: Evidence from Listed Firms in Taiwan

Academic journal article The International Journal of Business and Finance Research

Impact of Divestiture Activities on Corporate Performance: Evidence from Listed Firms in Taiwan

Article excerpt


This study examines how divesture affects the performance of listed companies in Taiwan. Divestiture describes firms selling their assets, production lines, subsidiaries or other segments for either cash or securities. This study focuses on two types of divestiture activities: sell-offs and equity carve-outs. Specifically, this work employs a control group design to examine 266 sell-off and equity carve-out announcements between 1995 and 2004, and measures the short-term abnormal stock returns and long-term (5 years) operating performance using financial ratios. The analytical results show significant positive stock abnormal returns associated with divestiture announcements for listed companies in Taiwan. Furthermore, firms generally experienced enhanced performance after undertaking divestiture activities.

JEL: G34, G14

KEYWORDS: Divestiture, Sell-offs, Equity carve-outs, Event study, Taiwan

(ProQuest: ... denotes formulae omitted.)


Firms can adopt numerous growth strategies, one of which is divestiture. One recent trend has seen diversified firms exhibit a diversification discount compared to stand-alone firms. Rajan, Servaes and Zingales (2000) think that with increased diversity in resources and opportunities, resources flow towards the least efficient division, resulting in less efficient investment and lower firm value. Studies show that firms that engage in divestitures and increase their focus achieve improved operating performance and stock returns (Comment & Jarrell, 1995; John & Ofek, 1995). Dittmar and Shivdasani (2003) indicate that the efficiency of segment investment increases considerably following divestitures.

Other empirical studies on divestitures focus on two areas, namely the impacts of divestiture activities on stockholder wealth and firm operating performance, respectively. Numerous studies have investigated the effect on shareholder wealth of firm announcements to voluntarily divest part of their operations, and all have shown that divestiture announcements positively affect parent firm stock returns ( Mulherin & Boone, 2000; Dittmar & Shivdasani, 2003; Datta, Iskandar-Datta, & Raman, 2003; Veld & Veld-Merkoulova, 2004). Regarding the impact of divestiture activities on the operating performance, Haynes, Thompson and Wright (2002) indicate that divestment significantly, positively and substantially enhances firm profitability. Hanson and Song (2003) found that divestitures improve firm operating performance, apparently by removing negative synergies. Most scholars support the perspective that divestitures improve operating performance (Hulburt, Miles & Woolridge, 2002; Dittmar & Shivdasani, 2003).

Few empirical studies have examined firm divestitures in Taiwan or other emerging developing economies. Therefore, it is worth exploring whether or not Taiwanese firms engaging in divestitures improve their performance. Regarding shareholder wealth effects, most previous studies focused on the wealth effect of merger/investment announcements and payment for acquisitions. Previous studies of the wealth effect associated with firm divestiture announcements have been insufficient. This study explores whether firm divestitures significantly affect stock returns.

This study examines a sample of 266 sell-offs and equity carve-outs between 1995 and 2004 and measures short-term performance based on stock returns and long-term (5 years) operating performance based on financial ratios. The evidence reveals significant positive cumulative abnormal returns associated with firm divesting announcements and that divestiture activities can improve their operating performance and enhance firm value. The rest part of this paper is organized as follows. Section 2 reviews the related studies. Section 3 depicts the sample. Section 4 reports the empirical results. Section 5 concludes.


John and Ofek (1995) documented a significant improvement in the performance of the seller firm's remaining assets in the two years following the divestment. …

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