Firm size and the gains from divestitures

Abstract

Recent academic studies indicate that corporate divestitures generate considerable shareholder wealth. The field is emerging as an important topic in the finance, strategy and organizational literature, but the understanding of what determines these gains remains somewhat fragmented and inconsistent. This thesis contributes to this understanding by specifically studying the effect of firm size on seller announcement abnormal return. We use a sample of 6699 divestitures completed by 2350 different sellers in the United States between 1995 and 2014 and conclude that small sellers outperform large sellers by an average of 1.96% at the announcement of divestitures. The size effect is robust to a wide range of firm and deal characteristics introduced by the literature. We propose that the size effect could be explained by greater idiosyncratic risk associated with the divestiture announcement by small sellers.