Australian Divestiture Activity: An Examination of Gains to Sell-Off Announcements

Abstract

This study examines the source of gains associated with Australian divestiture activity, defined as a voluntary modification of the firm's productive assets by a selloff of a complete operating division or wholly-owned subsidiary of the divesting firm. The sell-off announcement produces positive average abnormal returns of 1.15% over the two-day announcement period. We conclude that the gains arise predominantly from divestitures that have a strategic focus as demonstrated by, first, the divested unit is unrelated to the firm's core activities (a strategic divestiture), second, the significance of the strategic variable in explaining the positive market reaction in regression analysis, and, third, the finding of more significant results where the intended use of proceeds of the sell-off is for strategic purposes.

Which governance characteristics affect the incidence of divestitures in Australia?

“…Event studies show that divestitures create shareholder value (Cooney et al, 2004;Hanson and Song, 2006;Hillier et al, 2009;Hite et al, 1987;Lal et al, 2013;Lui, 2007). In their review paper, Eckbo and Thorburn (2008) estimate the seller's abnormal return at about 1.2%.…”

The enduring and evolving influence of Ball and Brown (1968)

“…They documented significant positive abnormal returns over the 2-day post-announcement window [0, +1]. Cooney et al (2004) then proceed to test competing theories of the source of these gains. Only divestitures that have a clear strategic motivation (i.e., selling off a unit unrelated to the firm’s core activities) generate significant positive abnormal returns.…”

“…Accounting variables, disclosure, financial statement impact (including IFRS) 1977, 1981, 1981, 1982, 2008, 2011, 2012, 2013, 2017Earnings 5 1978, 2000, 2008, 2016Analyst forecasts 4 2008, 2012, 2012Audit 1 1984Dividends 4 1977, 1979, 1993, 2016Share capitalisation/buybacks/rights 5 1977, 1979, 1987, 2001, 2008Takeovers and acquisitions 18 1976, 1984, 1985, 1987, 1987, 1991, 1994, 1998, 2000, 2003, 2004, 2004, 2004, 2004, 2005, 2012, 2015 the research questions are built on the contributions of BB68: through either its findings, its assumptions and/or its measurement metrics. The earlier group of papers tended to cite BB68, whereas the later papers do not, so much has BB68 become ingrained in the capital markets research tradition.…”

“…A closely-related strand of literature also posits that value is created on the divestiture of business units. With the advent of daily data, Cooney, Finn and Karl (2004) undertake an event study using a short window surrounding the announcement of a voluntary sell off. They documented significant positive abnormal returns over the 2-day post-announcement window [0, +1].…”

Value-creation through spin-offs: Australian evidence

“…They suggest that Australian companies undertaking a spin-off to restructure assets created value for shareholders and call for further investigation on whether this increased value is maintained. Other related studies include those of Cooney et al (2004) and Lal et al (2013). The former focuses on asset sell-offs and the latter investigates the announcement effect of Australian divestitures.…”