Predicting the Divestment of Prior Acquisitions

Abstract

We evaluate whether, in addition to seeking higher stock performance from acquisitions, firm managers also seek predictable stock performance. Building on prior research, we argue that higher volatility in a firm's stock performance following an acquisition is associated with divestment of a prior acquisition. Survival analysis of a longitudinal, panel dataset of 738 matched US acquisitions with 9,973 firm-year observations shows that higher volatility in an acquiring firm's stock performance, following an acquisition, significantly predicts divestment of a prior acquisition. This effect is independent and stronger than the effect of the mean stock performance of an acquiring firm following an acquisition. We also find moderating effects for acquisition relatedness and acquiring firm stock performance after an acquisition. When an acquired unit is related to the parent firm's operations, it will be more likely to be divested if subsequent stock performance displays higher volatility. Still, higher overall stock performance makes a parent firm less likely to divest an acquired unit, suggesting that larger mean returns override concerns about higher stock performance volatility during corporate restructuring. Theoretical backgroundCorporate strategy suggests that managers constantly re-evaluate their portfolio of businesses and restructure it by adding and subtracting