Sell‐offs, internal capital markets, and long run performance: Canadian evidence

Abstract

PurposeThe paper's aim is to analyze excess returns generated by Canadian sell‐offs and their links to changes in firms' internal capital allocation efficiency to test the efficiency of internal capital markets after assets divestitures.Design/methodology/approachThis study investigates the relationship between the level of the excess returns subsequent to sell‐offs and changes in the capital allocated through internal capital markets. The authors measure excess returns by calculating buy‐and‐hold abnormal (BHAR) returns up to three years after divestitures and test whether changes in value are related to changes in investment efficiency. The paper uses the relative value added by allocation (RVA) as developed by Rajan et al. to measure the variation in allocational efficiency of the internal capital market.FindingsThe study reveals that on average assets divestitures enable Canadian firms to keep up with the performance of their peers of the same industrial sector during the long‐run post divestiture period. A closer look at the results shows that the variation of long‐run post divestitures performance among Canadian firms is significantly and positively linked to changes in the allocational efficiency of the internal capital markets. These results suggest that dismantling some parts of the internal capital market does lead to improvements in firm value in the long run.Research limitations/implicationsThe sample is limited to a group of firms that sell off a portion of their assets. Further research could be conducted to determine whether other divestiture methods (spin‐off, sell‐off or equity carve‐out) have any impact on internal capital allocation efficiency and long run financial performance.Originality/ValueThe paper adds to other studies examining the source of gains from divestitures by documenting the effects of changes in internal capital allocation efficiency on the creation of long‐term shareholder wealth.