Event study method (ESM) is also used to examine the influence of firm divestiture announcement on stock market returns. Regarding event window selection, in order to apply the ESM, most researchers and practitioners consider the day before and after the announcement (for example, McNichols and Dravid, 1990; Denis and Sarin, 1994).
The existing studies show significant positive cumulative abnormal returns on the divesture announcement date. This means that investors may enjoy several benefits from companies’ involvement in divestitures. As a result, these abnormal returns are associated with such news, and with favorable market reactions on the announcement day.
The findings of most scholars have indicated that divestitures can often increase the firm’s performances and enhance its value. To illustrate, Brauer and Schimmer (2010) studied the abnormal returns of 160 divestitures within the international insurance field during 1999-2007. Unlike past research which is based on statistical clustering to investigate transaction programs, the authors used ad hoc corporate press releases that accompany divestiture announcements to categorize the divestitures.
While the vast majority of prior papers have analyzed divestitures as isolated events, the modern approaches focus more attention on divestiture programs, and take into consideration experience and timing effects that are absent from past works.
References and further readings
Afshar, K. A., Taffler, R. J. and Sudarsanam, P. S. 1992. 'The effect of corporate divestments on shareholder wealth: The UK experience'. Journal of Banking and Finance, 16: 115-135.
Alexander, G. J., Benson, P. G. and Kampmeyer, J. M. 1984. 'Investigating the valuation effects of announcements of voluntary corporate selloffs'. The Journal of Finance, 39: 503-517.
Brauer, M. and Schimmer, M. 2010. 'Performance effects of corporate divestiture programs'. Journal of Strategy and Management, 3(2): 84-106.
Denis, D. J., Denis, D. K. and Sarin, A. 1994. 'The information content of dividend changes: Cash flow signaling, overinvestment, and dividend clienteles'. Journal of Financial and Quantitative Analysis, 29: 567-587.
Denning, K. C. 1988. 'Spin-offs and sales of assets: An examination of security returns and divestment motivations'. Accounting and Business Research, 19(73): 32-42.
Hearth, D. and Zaima, J. K. 1984. 'Voluntary corporate divestitures and value'. Financial Management, 13(1): 10-16.
Hite, G., Owers, J. and Rogers, R. 1987. 'The market for inter-firm asset sales: partial sell-offs and total liquidations'. Journal of Financial Economics, 18: 229-252.
Jain, P. C. 1985. 'The effect of voluntary sell-off announcements on shareholder wealth'. The Journal of Finance, 40: 209-224.
John, K. and Ofek, E. 1995. 'Asset sales and increase in focus'. Journal of Financial Economics, 37: 105-126.
Kaiser, K. M. and Stouraitis, A. 2001. 'Reversing corporate diversification and the use of the proceeds from asset sales: The case of Thorn EMI'. Financial Management, 4: 63-102.
Klein, A. 1986. 'The timing and substance of divestiture announcements: Individual, simultaneous and cumulative effects'. The Journal of Finance, 41: 685-696.
Krishnaswami, S. and Subramaniam, V. 1999. 'Information asymmetry, valuation, and the corporate spin-off decision'. Journal of Financial Economics, 53: 73-112.
Lang, L., Poulsen, A. and Stulz, R. 1995. 'Asset sales, firm performance, and the agency costs of managerial discretion'. Journal of Financial Economics, 37: 3-37.
Lasfer, M., Sudarsanam, P. S. and Taffler, R. J. 1996. 'Financial distress, asset sales and lender monitoring'. Financial Management, 25(3): 57-66.
Markides, C. C. and Berg, N. A. 1992. 'Good and bad divestment: The stock market verdict'. Long Range Planning, 25: 10-15.
McNichols, M. and Dravid, A. 1990. 'Stock dividends, stock splits, and signaling'. Journal of Finance, 45: 857-879.
Miles, J. A. and Rosenfeld, J. D. 1983. 'The effect of voluntary spin-off announcement on shareholder wealth'. The Journal of Finance, 38: 1597-1606.
Rosenfeld, J. D. 1984. 'Additional evidence on the relationship between divestiture announcements and shareholder wealth'. The Journal of Finance, 39: 1437-1448.
Schill, M. J. and Zhou, C. 2001. 'Pricing an emerging industry: Evidence from Internet subsidiary carve-outs'. Financial Management, 30(3): 5-33.
Schipper, K. and Smith, K. G. 1983. 'Effects of recontracting on shareholder wealth: the case of voluntary spin-offs'. Journal of Financial Economics, 12: 437-467.
Shelor, R., Anderson, D. and Cross, M. 1992. 'Gaining from loss: Property-liability insurer stock values in the aftermath of the 1989 California earthquake'. Journal of Risk and Insurance, 59(3): 476-488.
Sicherman, N. W. and Pettway, R. H. 1987. 'Acquisition of divested assets and shareholder wealth'. The Journal of Finance, 42: 1261-1273.
Sun, M. 2012. 'Impact of divestiture activities on corporate performance: Evidence from listed firms in Taiwan'. The International Journal of Business and Finance Research, 6(2): 59-67.
Wright, P. and Ferris, S. P. 1997. 'Agency conflict and corporate strategy: the effect of divestment on corporate value'. Strategic Management Journal, 18: 77-83.