Economic policy uncertainty and corporate divestitures

Abstract

We examine the impact of economic policy uncertainty (EPU) on the propensity of firms to engage in divestitures. We find that EPU is positively related to the likelihood of divestitures in general and cashflow‐generating divestitures in particular. Consistent with the desire for cash being a driving force behind divestitures, we find that underperforming firms are more likely to engage in cashflow‐increasing divestitures. Firms that do not pay dividends and are relatively more reliant on government funding are also more likely to pursue sell‐offs and carve‐outs when economic uncertainty is elevated. We find no evidence that firms prefer staged divestitures (spin‐offs and carve‐outs) over non‐staged (sell‐offs) when EPU is high. Instead, EPU is positively related to the likelihood of non‐staged divestitures suggesting that firms do not wait until uncertainty is resolved to pursue deals with a high degree of irreversibility. Our findings point to EPU as a motivator for poor‐performing firms to shore up cash during times of EPU.