Divestment options under tacit and incomplete information

Abstract

While the literature has mainly focused on why a firm decides to divest a subsidiary, we investigate theoretically what the best divestment option is for a firm to divest a subsidiary. The firm chooses among the four most popular divestment options in practice: sell-offs, spin-offs, carve-outs, and management buyouts. In an infinite-period model, where divestiture is completed in the first two periods, the owners of a parent firm divest a subsidiary for the best value. The information possessed by the owners, subsidiary managers and outside buyers about the subsidiary's profitability may be complete or incomplete (the knowledge of information) and this information may be explicit or tacit (the nature of information). We investigate how the nature of information, the knowledge of information, risk aversion and discount on future performance determine the best divestment option.