COSTO TOTAL DEL PROYECTO

This research is focused on the divestiture process, and how firm divestiture experience may be related to divestiture process performance. Accordingly, there are six principal dependent variables that measure divestiture performance and the primary independent variable measures firm divestiture experience. The control variables capture a number of firm and unit characteristics to address possible alternative explanations. Variables specific to the coarsened exact matching models and the Heckman selection model are later described in their corresponding discussion in the “Analyses and Results” section.

1 _{T-tests using a variety of firm characteristics were performed to successfully confirm that there were no}

significant differences between those firms which had divestitures with a deal price and those firms which had divestitures for which no deal price was available.

29 2.3.2.1 Dependent variables

The outcome of most interest in this paper is divestiture process performance, which is measured in six ways. Completion is an indicator variable equal to one if the divestiture

transaction was completed, and equal to zero if it was incomplete. Duration measures the length

of time of the divestiture transaction, from the announcement date to the close date of the transaction, in units of days. Gain-to-Assets is a ratio that is a financially-based performance variable, calculated as the gain (or loss) on sale from the divestiture divided by the parent firm’s total assets. The gain on the divestiture sale may be interpreted as the “transaction premium,” as

it reflects the difference between the unit’s sale price and its fair market value. Announcement

Date CAR, Effective Date CAR, and Withdrawn Date CAR each reflect the firm’s cumulative abnormal returns (CAR), but are each based upon different dates for specific events in the divestiture process: the date that the divestiture was publicly announced, the date that the divestiture deal became complete and effective, and the date that an incomplete divestiture was formally withdrawn from the divestiture process, respectively. Event studies were used to calculate these three CAR-based variables through a multi-step process performed for each divestiture and for each event date of interest. For each divestiture, the announcement date, the effective date (if applicable), and the withdrawn date (if applicable) were collected from the Thomson M&A database. Firm stock return data were obtained in CRSP.

The first step in calculating the firm’s cumulative abnormal returns associated with a particular event is to estimate the firm’s expected returns. To do so, in this paper, the firm’s daily stock returns and the market’s daily returns were collected for a 250-day period (the estimation window) that began 800 days prior to the event date (i.e. from -800 to -551 days before the event). The firm’s expected, or normal, returns were then predicted from its daily stock returns and the market returns within the estimation window. The second step is to determine the firm’s actual returns around the event date. Here, actual returns were collected for a three-day window

30 around the event (i.e. spanning from one day before to one day after the event, -1 to +1). In the third step, the firm’s abnormal returns are found by subtracting the firm’s expected returns from its actual returns. This was done for each day in the three-day event window. Lastly, the abnormal returns for the event window are summed to determine the firm’s cumulative abnormal returns corresponding to the event. This procedure was repeated for each divestiture for each event of interest (divestiture announcement, effective, withdrawn), using estimation ([-800, -551]) and event ([-1, +1]) windows corresponding to each event date (Anand and Singh, 1997;

Feldman, Amit and Villalonga, 2014).2

2.3.2.2 Independent variables

The variable Divestiture Experience measures the firm’s cumulative divestiture

experience. To calculate this variable, the count of the number of divestiture transactions undertaken by the parent firm was first determined, and was then depreciated on a linear basis over the twenty-six years of the sample (Barkema et al., 1996; Ingram and Baum, 1997). More recent experience may be more relevant and accessible by the firm than distant experience, and thus more recent experience may play a larger role in divestiture transaction performance. Moreover, potentially fading organizational memories may impair the efficacy of more distant learnings (Levitt and March, 1988). Both complete and incomplete divestitures are included in the calculation, as firms still have the opportunity to learn from the divestiture process,

irrespective of the performance outcome (Madsen and Desai, 2010).3

2 _{Conclusions are robust to the use of an alternative 150-day estimation window [-515, -366] for the firm’s}

expected returns. Conclusions are also robust to the use of numerous alternative event windows (i.e. [-1, 0], [0, +1], [-2, +2], [-3, +3]) with both estimation windows.

3 _{Robustness checks were performed with multiple alternative operationalizations for Divestiture}

Experience. For example, the count of divestiture experience was depreciated using different discount factors (i.e. the square root and the square of the age of the divestiture experience, causing experience to

31 2.3.2.3 Control variables

There are two sets of control variables: the first set is focused strictly on the parent firm, and the second set pertains to the divested unit.

The first set of variables controlled for a number of important characteristics of the parent firm, concerning its size, financial health, management efficiency, and diversification. The components of these variables are all lagged by one year prior to the year of the divestiture announcement, to ensure a properly representative picture of the firm at the start of the divestiture process.

The variable ln(Total Assets), with total assets in units of $Million, was used to control

for the size of the parent firm. Larger firms have more resources than smaller ones; with more operations comes more opportunity to engage in divestiture.

Three variables were used to control for the state of the firm’s financial health: Negative

Net Income, Leverage, and Tobin’s q. Negative Net Income, an indicator variable, is set equal to

one if the firm reports negative net income, and is zero otherwise. Leverage, which varies from

zero to one, is the ratio of the firm's total debt to the sum of the firm’s total debt and its market

capitalization. Higher values of Leverage represent greater indebtedness. Tobin’s q is the market

value of parent’s assets divided by the book value of its assets. The market value of the assets is calculated as the sum of the market capitalization of the firm's equity and the book value of its debt. Thus, Tobin’s q is calculated as ((Common Shares Outstanding*Close Price) + (Current Debt+Long Term Debt)) / (Total Assets). Close price is the share price at the end of the last trading day of firm's fiscal calendar. Firms with constrained financial resources, such as indebted or profitless firms, may have a greater propensity to divest as means to generate cash for the firm.

depreciate more slowly and more rapidly, respectively, than in the linear case), the experience count was not depreciated at all, and only completed divestitures were included in the experience count. Conclusions are robust to these alternatives.

32

Return on Equity was used to control for management efficiency. It is the ratio of the firm's net income to the shareholders' equity, calculated as (Net Income) / (Total Assets-Total Liabilities). Poor managerial efficiency, or low values of Return on Equity, may serve as an impetus for the firm to engage in divestiture as a means to improve its return.

Firm diversification was controlled for by using the sales-based Herfindahl Index. The

Herfindahl Index is calculated as the sum of Pi squared, where Pi is the proportion of a firm's sales in segment i. As the index approaches 1, the more the firm’s sales are concentrated within

fewer business segments. Highly diversified firms, or those having small Herfindahl Index

values, may see divestiture as a means to refocus their businesses and potentially improve performance (cf. Berger and Ofek, 1999; John and Ofek, 1995; Markides, 1992).

The second set of control variables characterized the relationship between the business unit and the parent firm. Unit-Parent Size Ratio was calculated as the divestiture transaction price divided by the market value of the parent firm. Thus, market-based financial measures are being used to capture unit and parent size. Since Unit-Parent Size Ratio had some outlying observations on the right hand side of its distribution, the variable was winsorized at the five percent level to account for these observations and to confirm that they were not biasing the

results. Unit-Parent Geographic Relatedness is an indicator variable set equal to 1 if the parent

firm's headquarters and the unit are both located in the same country, and zero otherwise. Unit-

Parent Industrial Relatedness is an indicator variable set equal to 1 if the parent firm and the unit share the same 3-digit SIC code, and zero otherwise. Parent firms may have a greater propensity to divest units that are smaller or less related (be it on an geographic or industry basis) as they may be easier to separate from the parent firm.

Lastly, the final control variable category considers the parent firm’s divestiture operations. Divestiture Program is an indicator variable set equal to one if the parent firm has made at least three divestiture announcements within the last three years. Firms engaged in a

33 divestiture program, reflected by a number of divestitures occurring in rapid succession, may have a greater propensity to divest in order to finish all divestiture activity within a defined period (Brauer and Schimmer, 2010) to avoid the potential negative reputational effects that are sometimes associated with divestiture (Boot, 1992; Hayward and Shimizu, 2006; Dranikoff et al., 2002).

2.4 ANALYSES AND RESULTS