Ownership Structure and Divestiture Decisions: Evidence from Australian Firms

Abstract

Divestitures have the potential to create shareholder value by helping firms optimize their portfolio of assets. Even so, firms do not necessarily take up divestitures because of agency problems. In fact, large controlling shareholders may prefer to extract private benefits of control at the expense of minority shareholders. In addition, divestitures may expose the misappropriation of corporate resources. In this paper, we explore the role that other blockholders play in constraining the largest shareholder’s influence. The results indicate that divestiture activity decreases with the ownership of the largest shareholder, which imposes a cost to minority shareholders since the firm’s value is not maximized. The presence of another significant blockholder appears to curb this negative bias towards divestitures. This finding provides an economic rationale for the higher performance of firms characterized by more balanced ownership structures. Involvement of family owners also appears to provide similar benefits.