Subsidiary divestiture and acquisition in a financial crisis: Operational focus, financial constraints, and ownership

Abstract

We exploit parent-and subsidiary-level data for publicly listed firms in Thailand before, during, and after the 1997 Asian Financial Crisis to investigate the extent to which firms with different types of ownership restructure their business portfolios, in terms of divestitures and acquisitions. We compare restructuring choices made by firms mostly owned by (a) domestic individuals with block shares (family firms), (b) domestic firms and/or institutions (DI firms), and (c) foreign investors (foreign firms). We show that following the crisis (1) foreign firms' restructuring behavior is the least affected; (2) domestic firms owned by families and domestic institutions (DI) behave similarly to one another; (3) domestic firms do not increase divestiture in their peripheral segments to improve operational focus or to obtain cash in a credit crunch; they actually reduce divestiture in core segments; and (4) domestic firms also significantly reduce the acquisition of new subsidiaries. Our results challenge traditional explanations for divestiture such as corporate governance, operational refocus, and financial constraints. They indicate that in the great uncertainty of a crisis, domestic firms are able to hold onto their core assets to avoid fire-sale. In essence, they act more conservatively in churning their business portfolios.Published by Elsevier B.V.

Ownership structure, family control, and acquisition decisions

“…Regarding divestitures, nonfamily firms tend to divest more than family firms, as the median tests show. This finding is consistent with the results of Zhou et al (2011), who document conservative behavior by family firms in restructuring their business portfolios, avoiding fire sales and holding on to their assets. Table 11 reports in Panel A the results of OLS regressions of firm-year growth (in Total Assets, Tangible Assets, and Sales) on a set of independent variables that include the ownership variables, some of the control variables already employed in this study that can be expected to influence growth rate, and country and industry fixed effects.…”

Does ownership concentration improve M&A outcomes in emerging markets?

“…We also find that in the 2001-2004 period, while ownership concentration in the hands of foreign promoters enhanced post-M&A profitability -in contrast to the findings of Zhou et al (2011), ownership concentration in the hands of Indian promoters did not have any impact on post-M&A firm performance. A cautious interpretation of the more reliable regression results for the 2001-2004 period is that while ownership concentration may reduce Agency Problem I (between managers and owners), it may increase Agency Problem II (between large or majority and small or minority shareholders), such that ownership concentration in the hands of insiders may not necessarily improve M&A outcomes.…”

Not all family firms are equal: The moderating effect of family involvement on the political risk exposure of the foreign direct investment portfolio. Preliminary evidence from Spanish multinational enterprises

“…FFs tend to be more stable in terms of ownership and consequently in terms of behaviors (Anderson & Reeb, ). Stability is a fundamental component of the bridging form of SC as it promotes the development of reciprocal trust with external actors (Scholes, Mustafa, & Chen, ) and allows FFs to develop strong relationships with external stakeholders (Y. M. Zhou, Li, & Svejnar, ).…”