"Out with the Old, In with the New?: The Impact of Divestitures on Firm Performance"

Abstract

Multiple studies have investigated the relationship between divestiture activity and subsequent performance, and the results are mixed. This paper explores the relationship between divestitures and subsequent performance, the mediating role that firm strength has on said relationship, and the mechanisms by which divestitures affect subsequent performance. We find that divestitures benefit strong firms to avoid becoming a target for acquisition and to further growth, while they benefit weak firms with regards to their accounting performance. Findings also suggest that divestitures allow firms to free both financial and managerial resources that are later reinvested in the operational activities of the firm.