DIVESTITURE UNCERTAINTY AND SHAREHOLDER WEALTH: EVIDENCE FROM THE U.S.A. (1975–1982)

• DOI: http://doi.org/10.1111/j.1468-5957.1986.tb01173.x
• Author: Douglas Hearth,Janis K. Zaima
• Published date: 01 March 1986
• Date: 01 March 1986

Journal

o/Burincss

Finance

HAccounfing,

13(1),

Spring

1986, 0306 686X $2.50

DIVESTITURE UNCERTAINTY AND SHAREHOLDER

WEALTH: EVIDENCE FROM THE U.S.A.

(1975-

1982)

DOUGLAS

HEARTH

AND

JANIS

K.

ZAIMA.

INTRODUCTION

A

corporate divestiture can take one of two forms: spinoff or selloff. In a

spinoff, the asset(s) divested forms a new independent firm with the

shareholders of the divesting corporation receiving shares in the new corpora-

tion.

A

selloff involves the sale, usually for cash, of the asset(s) to another cor-

poration. The shareholders of the divesting firm usually retain no link to the

divested asset(s).

As

corporate divestiture activity has increased in recent years,

so

too has the

number of studies examining the valuation consequences of both spinoffs and

selloffs.

'

While addressing different issues, all find evidence that public

announcements of voluntary (i.e., not the result of antitrust or similar action)

divestitures are associated with significant positive abnormal returns in the

divesting firm's common stock. These results lead to the overall conclusion that

voluntary divestitures increase the wealth of divesting firm shareholders.

Generally, existing studies concentrate on price movements around the date

of the first public announcement of the impending divestiture. The announce-

ment date, however, constitutes only one of two important 'events' during the

divestiture process. The other is the resolution date, the date the divestiture is

either called off or completed. Thus the divestiture process can be divided into

three periods:

the

pre-announcement period, the interim period (the period

between the announcement and resolution dates) and the post completion

period.

While the divestiture announcement conveys information to the financial

markets,

it

may not convey all relevant information and may actually create

uncertainty. Potential uncertainty could come from three sources. First, it is

possible that the divestiture could be called off, second the terms of the

divestiture might change between the announcement and resolution dates and

third, there may not be sufficient evidence that the economic benefits of the

The authors are respectively, from the College

of

Business Administration, University

of

Colorado

-

Boulder; and the University ofColorado

-

Denver.

(Paper

received November

1984,

revised April

1985)

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