Downsizing and Downscoping Divestitures

Abstract

Extant research examining the effect of environment on firm divestitures has led to some contradictory findings. This is primarily because previous research has not paid enough attention to changes in divestiture strategy under varying environmental conditions. Firms undertake divestitures either to get rid of the inefficiencies resulting from excessive diversification or to eliminate efficiencies resulting from having redundant capacity within businesses. Downscoping divestitures create value for the firm by reducing business scope whereas downsizing divestitures improve firm performance by reducing business size. This paper argues that in a less munificent environment resulting from an exogenous change in access to capital, firms undertake 75% fewer downscoping divestitures and 31% more downsizing divestitures as compared to the munificent environment. Also, downscoping does not improve firm performance in a less munificent environment whereas downsizing leads to growth in firm performance. The study uses the European debt crisis as a context for a less munificent environment. This paper resolves ambiguity in previous findings on divestitures and also contributes to the literature on corporate strategy and business diversification.