Divestitures and Firm Performance: The Moderating Role of Internal and External Experience

Abstract

Drawing on organizational learning theory, this paper examines the moderating influences of different forms of internal and external sell-off experience on the relationship between firm sell-off activity and subsequent firm accounting performance. Results from a longitudinal analysis of sell-off activity by 281 companies over a 20-year period (1990-2009) are consistent with basic predictions from learning theory suggesting a positive moderating influence of a firm’s general sell-off experience on the relationship between firm sell-off activity and firm performance. This study, however, further argues and finds that the composition of a firm’s general sell-off experience matters greatly. Specifically, we find that learning benefits are greater for sell-offs involving related rather than unrelated assets, and that high levels of experience heterogeneity negatively affect the relationship between firm sell-off activity and subsequent firm performance. Further, external sell-off experience by advisors and by industry peers is found to positively influence the divestiture-firm performance linkage. Collectively, the findings on the importance of the “composition” of a firm’s general sell-off experience and the influence of external experience help resolve some of the equivocality in previous organizational learning research, and extend prior research on divestiture performance.