1. 12 Chapter Empirical Tests of Corporate Restructuring and Divestitures

2. Event Studies of Restructuring

3. Event Studies of Asset Sales

4. Sources of Wealth Gains • Studies of restructuring often find the larger the divestiture, the larger the announcement return • Asset sales: returns to buyer and seller likely represent efficient redeployment of assets • Information vs. Efficiency • Unsuccessful asset sales lose gains from announcement – Efficiency (Hite et al, 1987) • Wealth effects related to ratio of subsidiary to parent – Efficiency (Vijh, 2002) • Announcement causes negative stock returns to competitors – Efficiency (Hulburt et al, 2002)

5. Corporate Focus • Corporate focus possible source of gains: executives better able to monitor firm with narrow scope • Studies compare related and unrelated divestitures – usually using SIC codes (imperfect measure) • Some evidence that divestiture of unrelated subsidiaries (compared to related) had higher returns in 1980s vs. 1990s – corporate focus can’t explain all gains in divestitures

6. Event Studies of Relatedness

7. Corporate Focus • Focus, diversification, and firm value • Focus increased in 1980s – firm value also increased (but many alternative explanations) • Multi-segment firms tend to have lower values • Is there a diversification discount? • Difficult to measure link between focus and value • Difficult to quantify “diversification discount” • Acquisitions create wealth, but Graham et al (2002) found reduces excess value in combination – conclude methods of measuring conglomerate discounts must be reconsidered

8. Choice of Divestiture Methods • Spinoffs vs. asset sales – choice depends on tax implication and financial constraints • Spinoffs vs. equity carve-outs – firms choose carve-outs when subsidiary has more growth opportunities (parent often keeps stake long term) • Organizational choices balance cost of market transactions and cost of firm hierarchy