Divestment Decisions Research Articles

Investing in Art: The Informational Content of Italian Painting Pre-Sale Estimates

As the size of the art market increases and a growing number of investors are attracted by the high returns, the amount and quality of information available to market participants becomes increasingly relevant, especially for less experienced investors. One of the most relevant information sources in the art market is the price estimate provided by auction houses, that is the price that auctioneers believe a piece of art might bring at auction. Auction houses are regarded as providing additional valuable information to market participants. Thus pre-sale estimates could be useful reference points in the art valuation process, driving operators' investment and divestment decisions. However, as the price of each unique artwork is affected by inconstant and intangible factors, estimates are usually expressed as a range within which the experts forecast the final price will fall. The informational content of such estimates can be examined along two dimensions: the uncertainty and the accuracy of estimates in predicting sale prices. We test for any systematic differences in predicting hammer prices using a sample of 1,975 sales of Italian paintings which were sold all over the world at least twice during the 1985-2006 period. Three results emerge from the empirical evidence. First, pre-sale estimates are not good predictors of final sale prices. Second, uncertainty and accuracy in price prediction decreases and increases, respectively, when Italian paintings are auctioned in Italy, thus revealing a Country effect. Finally, the informational content of estimates is affected by past prices, thus revealing an anchoring effect.

Examining the Impact of Divestment from Fossil Fuels on University Endowments

Between 2011 and 2018, 35 American universities and colleges divested, either partially or completely, their endowments from fossil-fuel holdings, marking a shift toward sustainability in university endowment investment. However, the decision by these universities to divest was often marred by controversy, owing to conflicts between student- and faculty-led coalitions and the university board. Principally, endowment fiduciaries are averse to divestment decisions because they think that it will hurt the endowment's value, but this concern, motivated by a narrow interpretation of fiduciary law, can be empirically examined. To date, the academic study of the effect of divestment on endowment values has focused on the top university endowments and has produced mixed results. Our study is different from the extant but limited literature in this area in that we examine holistically the impact of total or partial divestment on endowment values for all universities as well as a select group of institutions that are illustrative of their peers by endowment size. More importantly, we evaluate the assumption that divestment does injury to endowment values through legal and empirical lenses. Results from our difference-in-differences analyses of the effect of full and partial divestment suggest that either form of divestment does not yield discernible consequences--either positive or negative--for endowment values, at statistically significant levels. However, we do find evidence that divestment improved the value for three of four universities that we examined through synthetic control analysis, with the greatest increase in value at a university with a very large endowment (Stanford University) and modest increases at two universities with mid-sized and large endowments, respectively (University of Dayton and Syracuse University). Thus, the negative consequences of divestment may be overstated in the near-term. This challenges the assumption that divestment yields negative returns to endowments and cracks open the door for endowment fiduciaries to divest without violating duties of loyalty and prudence. We hope that this study both grounds and advances the debate about endowment divestment with empirical evidence and a reasoned discussion of its costs and benefits.

Legitimation Strategies as Valuable Signals in Nonfinancial Reporting? Effects on Investor Decision-Making

Companies disclosing negative aspects in sustainability reports often employ legitimation strategies to present mishaps in a favorable light. In incentivized experiments, we find that nonprofessional investors divest from companies with a negative sustainability-related incident, and that symbolic legitimation (which only evasively explains a negative incident) is not a strong enough signal to counter this divestment behavior. Even substantial legitimation (which reports on measures and behavioral change) mitigates the divestment decisions only if the company reports on concrete remediation actions in morally charged situations, such as social or environmental incidents. We elaborate these results in light of signaling and screening theory, and suggest the conceptual extension of “costly signals” to what we call “valuable signals.” We argue that valuable signals need be not only costly for the sender from an economic perspective but also perceived as appropriate by the receiver from a noneconomic perspective.

Who Stays and Who Goes? The Role of Reputation in Firms' Divestment Decisions

Who Stays and Who Goes? The Role of Reputation in Firms' Divestment Decisions

Improving strategic decision making with big data-based media analysis - the case of coal power

Big-data based methods are developed to aid corporate decision-making. This study utilises big-data based global media-analysis to clarify the role of coal-power related media-image in company decision-making. Opinion mining by a specific software tool for media-analysis and monitoring is utilised. The analysis bases on the notion that the media-image of company products - or specific technologies - may impact corporate investment and divestment decisions in the energy sector. The assumption is that coal-power related media-image may cause corporate brandimage pressures. The findings indicate that the general media-sentiment towards coal-power is negative, possibly influencing corporate decisions. The large negative media-sentiment towards coal-power may override the benefits of developing cleaner coal-power and related technologies such as carbon capture and storage and utilisation. The negative media-sentiment towards coal-power may mitigate the more positive image of related less-known technologies. Evidence is provided on the media-impact of coal-power related divestment decisions and potential impacts on decision making.

Managerial rationales for investing and divesting under uncertainty

AbstractThis study examines the strategic investment and divestment decisions of fifteen Norwegian power companies that were made in response to an increasingly uncertain business environment. The ...

Change in domestic network centrality, uncertainty, and the foreign divestment decisions of firms

We investigate the role of domestic interfirm networks for the foreign divestment decisions of firms. We argue that firms’ foreign operations risk being divested when a firm becomes more central in its domestic network. Positive changes in firm centrality at home facilitate access to information about new business opportunities, but they may also lead firms to consider reconfiguring their value chain activities and resources across locations. The resulting opportunity costs of maintaining foreign operations could subsequently lead to their divestment. Moreover, we argue that the positive association between an increase in firm centrality in the domestic network and foreign divestment is stronger under higher uncertainty, as pursuing new business opportunities at home becomes more appealing. We distinguish between firm-specific uncertainty and domestic market uncertainty. We test and get support for our hypotheses using foreign subsidiary data from U.S. firms in the ICT industry.

The Role of Rivals in Foreign Divestments of International Healthcare Systems

This study bridges the research gap between oligopolistic reaction and foreign divestment strategy. Based on a 40 year dataset that captured the divestment decisions of the largest international he...

Foreign divestments from Russia: An exploration of the mediating factors

Foreign divestment (FD) decisions are not purely based on the profitability of a business but also on a company's investing and divesting experience and the degree of uncertainty in markets. The FD procedure is grounded by the level of uncertainty, experience in divesting, and experience in investing. Both internal and external factors are catalysts for the firms’ foreign divestments. The constructs of real options theory, prospect theory and the theory of bounded rationality are three key moderators in the firms’ FD decision‐making.

Divesting, Fast and Slow: Affective and Cognitive Drivers of Fading Voter Support for a Nuclear Phase-Out

Overcoming reliance on non-renewable resources is a key concern of energy transitions worldwide. But as the literature on carbon lock-in has shown, overcoming path dependence is all but trivial. Even well-minded decision-makers tend to relapse into inertia when it comes to making concrete divestment decisions. We investigate one specific case, the 2016 Swiss popular initiative to phase out nuclear power, to explore the cognitive and affective drivers of energy path dependence on the individual level. Within eight weeks of an intense political campaign, support for this initiative dropped from more than 60 to just 45.8% of Swiss voters. Based on a representative longitudinal survey (N = 1014), we show that changes in perceived risk and benefit of nuclear power play key roles in explaining fading voter support for nuclear divestment, and that affect is in turn a significant driver of those changes. By framing it as a choice between the lesser evil of nuclear power or importing German coal power, opponents of the phase-out managed to introduce an asymmetrically dominated option into voters' choice set, leading many to change their original voting intentions. Our paper responds to calls for integrating dual-process theories (“thinking fast and slow”) into research in Ecological Economics.

Impact of Divestment Decisions on Shareholders' Wealth

In 2000, Procter & Gamble (P&G) had more than 200 brands in its portfolio. The U.S. based fast moving consumer goods (FMCG) company was growing by leaps and bounds. In the decade that followed, P&G continued its expansion spree through organic and inorganic growth. With revenue of $84 billion in 2012, P&G was the largest FMCG company in the world. The dividend payout to the shareholders was a regular feature for more than five decades. The company had numerous popular brands in its portfolio. These wonderful figures, however, masked a bitter truth. The company's innovation funnel had dried up, and consumers were shifting to low priced alternatives. Unilever, P&G's arch- rival, was increasing its stranglehold in the developing world. P&G decided to become a lean and agile organization through divestments. The company cut costs and improved processes to improve productivity. P&G revisited its diversification strategy and decided to focus on its core and profitable brands. The objective of this study was to examine whether P&G's divestment strategy added value for the company's shareholders. The study used the standard event study methodology to examine the impact of six divestment announcements made by P&G between 2014 and 2016 on shareholders' wealth. The findings of the study suggested that shareholders' of P&G benefitted when the company divested its pets food business. The market reaction was negative when P&G divested its immensely popular Duracell brand. However, no significant abnormal returns were witnessed when P&G sold its Zest and Camay brands to Unilever.

The investment-divestment relationship: Resource shifts and intersubsidiary competition within MNEs

This paper examines the interdependencies between MNE investment and divestment decisions. We derive a conceptual framework of “segmented intersubsidiary competition” and hypothesize that the competitive pressure of new investments on existing subsidiaries varies by regional dimension. Based on a database of 3524 French MNEs, we analyse intersubsidiary competition and intertemporal adjustment processes of the investment-divestment relationship between 2002 and 2010. Our empirical findings support the theoretical notion of segmented intersubsidiary competition within MNEs: Foreign investments create competitive pressure for foreign subsidiaries to be divested in subsequent periods, where domestic investments spur divestment at home. Inversely, foreign divestments are more likely to create new investment opportunities in the foreign than in the domestic arena. Our differentiations between investments/divestments in EU countries and in non-EU countries shows that the competitive pressure of new investments on existing subsidiaries is mainly limited to the same region.

Production, Capacity, and Liquidity of a Financially Constrained Firm

This paper studies the optimal coordination of operational and financial decisions of a firm with restricted and costly access to capital markets. The firm dynamically manages its production capacity and cash reserve by making production, divestment, investment, dividend, and capital injection decisions each period. The paper characterizes the optimal policy and shows that it corresponds to the optimal exercising of the real options embedded in the capacity and cash. A distinguishing feature of these real options is that they are embedded in each other, reflecting the fact that in a dynamic setting, exercising a real option in capacity or cash generates additional capacity or cash, thus additional real options. As the capital market becomes less frictional, the values of the real options in capacity and cash increase, and the firm is more likely to raise capital but less likely to issue dividends to exploit the higher values of the real options. As the firm places more emphasis on maximizing the operating profit rather than the shareholder's value, the values of the real options in capacity increase, and the firm exhibits a more aggressive investment attitude.

Market Exit Through Divestment—The Effect of Accounting Bias on Competition

We analyze the effect of accounting bias on the competition and market structure of an industry. In our model, firms’ interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system. We find that this bias strictly decreases firms’ profits when investors do not have an abandonment option, but different results emerge when we allow the investors to divest in the interim. Specifically, a conservative accounting regime may increase the likelihood of projects being discontinued, inducing some firms to exit from the product market and leaving rivals to capture their market share. A conservative regime can thus soften market competition and result in ex ante higher investment payoff, higher consumer surplus, and higher total social welfare. Since industries often have common reporting standards, we also identify the degrees of industry-wide accounting bias that maximize the expected investor payoffs. Finally, we allow for investors to coordinate their divestment decisions when both firms report unfavorable costs and show an improvement to both firm profits and consumer surplus. This paper was accepted by Mary Barth, accounting.

An Integrated Perspective on Foreign Ethical Divestment

Much of the existing literature on foreign ethical divestment has been developed in isolation and scattered across multiple disciplines. This article reviews the existing literature on foreign ethical divestment to extract emerging themes and outline new directions for future research. Our review uncovered that foreign ethical divestment decisions can be attributed to macro‐, firm‐, and individual‐level factors. We therefore develop an integrated model to link the dynamics of ethical foreign divestment. The study identified a number of unanswered questions and implications for future research. © 2016 Wiley Periodicals, Inc.

Adverse selection, slow-moving capital, and misallocation

We embed adverse selection into a dynamic, general equilibrium model with heterogeneous capital and study its implications for aggregate dynamics. The friction leads to delays in firms’ divestment decisions and thus slow recoveries from shocks, even when these shocks do not affect the economy’s potential output. The impediments to reallocation increase with the dispersion in productivity and decrease with the interest rate, the frequency of sectoral shocks, and households’ consumption smoothing motives. When households are risk averse, delaying reallocation serves as a hedge against future shocks, which can lead to persistent misallocation. Our model also provides a micro-foundation for convex adjustment costs and a link between the nature of these costs and the underlying economic environment.

The Role of Home Country Institutional Pressures in MNE Divestment Decisions

We examine how nongovernmental organizations and home governments influence MNE divestment from host countries rife with sociopolitical conflict. We contend that MNEs divest when these institutional actors are critical of a host country and provide informational signals to consumers about controversial corporate operations abroad. We analyze the divestment decisions of 444 MNEs from 31 countries operating in Burma between 1995 and 2002. Observational data are complemented by a survey experiment focusing on consumer reactions to calls for boycotts and provide support for our contentions. We contribute to international business scholarship by exploring new mechanisms through which institutional actors influence divestment.

To Divest or not to Divest: A Meta‐Analysis of the Antecedents of Corporate Divestitures

Corporate divestitures have been identified as important strategic actions with a positive impact on firm performance. Yet, what is still missing in the strategic management literature is an integrative framework that quantitatively synthesizes the relative impact of various antecedents to divestitures, and theoretically reconciles the multitude of theories underlying divestiture research. To fill this gap, the author conducts a meta‐analysis (based on a sample of 35 studies) and develops four broad categories of determinants: corporate governance; firm strategy; performance; and industry environment. Evidence is found that divestitures are driven mainly by prior divestment experience, structural factors (firm size and firm diversification) and weak unit performance. In addition, the relative predictive validity of several theoretical perspectives on divestment decisions is assessed.

Organizational Image, Identity, and International Divestment: A Theoretical Examination

International divestment is a prevalent phenomenon and should be viewed as an integral part of the internationalization process. Nevertheless, the field of international business and strategy has paid scant attention to this topic. We develop a conceptual framework to examine a firm's propensity to divest internationally and the type of foreign operations it will divest. We posit that a firm's international divestment decisions are influenced by its organizational image and identity. Premised on this behavioral perspective, this article develops a theoretical model and generates a set of propositions to shed light on the topic of international divestment.

Path Dependence in the Evolution of the Business Portfolio Configuration of Large Multi-business Firms

Based on learning theory, this study introduces a distinction into three orders (zero, first, second) of path dependence. Applying econometric time series analysis (VAR models), we explore the order of path dependence in firm investment, divestment, and cooperation decisions. An extension to prior research, we not only investigate the order of path dependence for each type of portfolio decision but also investigate the order of path dependence in firms’ collective portfolio decision making. Results show differences in the order of path dependence for the three types of portfolio decisions between firms. Moreover, the collective portfolio activities display a different order of path dependence from the analysis of each portfolio activity separately, which indicates substantial interactions among them. In sum, our empirical analyses indicate the need to distinguish between different orders of path dependence and to demonstrate that an organizational activity is not only dependent on its general conditions, as contingency theory argues, nor is it solely dependent on its own history, as classical path dependence theory argues. Instead, an organizational activity is also dependent on the history of related activities.