Life Cycle, Divestment and Corporate Governance

Divestment activities have become a popular trend in recent years. This thesis is a pioneering UK study examining divestitures from three points of view: shareholder wealth; corporate governance, and the life cycle.

While the growth factor is important for most firms, most previous divestment research appears not to have given enough emphasis to the growth variable. This research emphasises the importance of the growth variable and the importance of two variables, growth and concentration ratio, are examined in a classification study, thereby enhancing previous research. Furthermore, most of the previous literature would appear to have made a more general investigation of divestments without reference to shareholder wealth or the corporate governance characteristics of each life cycle stage. The question is then raised: “Will market reaction to divesting firms be different when they are classified into different life-cycle sub-samples?” This study classifies divestments into different life cycle stages and seeks to provide a detailed study of understanding market reaction and corporate governance across the life cycle.

For the cluster analysis, three clusters (late expansion, early maturity and mature/decline) are found. Young firms have lower agency problems and older firms have higher agency problems. The research builds a detailed picture of share price performance for different life cycle stages, finding that the market takes a more positive view of divestitures across the life cycle on the divestitures announcement day. In contrast, the market takes a less positive view for divestures across the life cycle during the post-announcement period, including day 0 to day +60. Finally, the research uses regression analysis to examine the impact of different corporate governance variables on the stock market reaction across different stages of the life cycle. The finding is that the size of the divested unit is positively significant for divesting firms for all three stages in the life cycle. The corporate governance variable still plays quite an important role in the regression.