Lifelines and Sinking Ships: Investor Reactions to Divestments During Industry Change

Abstract

Navigating a period of industry change can be challenging for incumbent firms. In this paper, we consider an important barrier to adaptation – technological commitment – and analyze how investors react to a firm’s departure from its core position. We argue that, over time, cost efficiency concerns and shareholder advocacy potentially moderate the negative impact of commitment to a fading technology on market valuation. Building on the industry change and corporate divestment literatures, we argue that it will be increasingly difficult for incumbents with greater technological commitment to exit from this position even as the transition becomes more inevitable, unless investors formally pressure the firm to do so. We find support for our arguments from an event study of announcements of coal plant retirements by U.S. public electric utilities from 2007 to 2019. Our results contribute to understanding challenges with incumbent adaptation to environmental disruptions, as well as the urgent issue of climate change mitigation.