Foreign Asset Divestitures by U.S. Firms: An Analysis of Motives and Valuation Consequences

Abstract

We test a set of theoretic postulates predicting the choice and value impact of foreign asset divestiture strategies. Following Chen and Gou (2005), we argue that firms may be driven by a variety of motives to divest their foreign assets depending on their pre-divestiture performance, financial structure, possible existence of agency conflict, scale and scope of their business operations, and future growth opportunities. We find support for the financial distress hypothesis only in the case of those financially constrained firms that reduce their leverage in the post-divesting period. Further, we report support for the capital constraint hypothesis for firms that have a record of high capital expenditures in the pre-divestiture period and that are relatively free from agency conflict. Finally, our results support the focus hypothesis for over-diversified firms.