City Research Online

Abstract

Corporate sell-offs bear close similarities to takeovers and their financial and strategic implications for both sellers and buyers are equally important. The sell-offs, despite their importance, are not as well investigated as the takeovers. Previous studies on the wealth implications of sell-offs on the sellers’ shareholders report predominantly positive wealth changes but they are not unanimous. The empirical evidence on the effect of sell-offs on the buyers’ shareholders is even more scarce and limited only to the US market. These studies are split evenly between those reporting significant gains to the buyers and those reporting no wealth effect. However, most of the previous studies have used small samples, many important factors have not yet been investigated and attention has not been focused on identifying the potential sources of value creation of sellers and buyers following a sell-off.

This study attempts to shed light on the sources of wealth changes of the shareholders of the seller and buyer following a sell-off announcement by addressing the following research questions:

1) What is the motivation of the sellers for the sell-off, what are the wealth implications of the sell-off announcements on the sellers’ shareholders and which are the sources and the determining factors of these wealth changes?

2) How are the shareholders of the buyers affected by the purchase decision and which factors determine their wealth experience?

We investigate the effects of corporate sell-offs on the sellers using a sample of 1,941 corporate sell-offs over the period 1987-93. This is the largest study in this area to date. In order to identify the sources of value changes to the sellers’ shareholders, we employ the joint reading of cumulative abnormal returns and cumulative abnormal forecast revisions of earnings.

We document that corporate sell-offs are value increasing for the sellers and that at least part of that wealth increase is due to the expected increase of the sellers’ profitability. Our results reveal that sellers benefit from the sell-offs only during the years 1992 and 1993. This is an interesting temporal pattern of sellers’ gains in the context of the condition of the British economy. We also document a positive relationship between the wealth gains of sellers and the relative size of the sale, the investment opportunities available to the seller, the size of the deal and the condition of the seller’s financial health and a negative relationship with the increase in seller’s focus, the relative location of buyer and purchased division and the condition of the economic environment.

Employing a sample of 877 sell-offs, in which the buyers are UK companies, we investigate the effects of divestments on the buyers over the period 1987-93. We find that the buyers benefit from the purchase and that these gains are wealth transfers from the sellers. We also find that the wealth gains of the buyers are positively related to the relative size of the purchase, the set of investment opportunities of the seller, the financial health of the buyer and seller, the relative size of seller and buyer and the relative location of buyer and purchased division. However, the condition of the economic environment, the level of fit of purchased division to the operations of the buyer, the investment opportunities of the buyer, the size of the deal and the level of debt in the capital structure of the buyer are not significantly related to the wealth changes of the buyer following the purchase.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
Departments:	Bayes Business School > Actuarial Science & Insurance Bayes Business School > Bayes Business School Doctoral Theses Doctoral Theses

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