Causes and Effects of Corporate Refocusing Programs

Abstract

We provide evidence that corporate refocusing are motivated, in part, by the desire to enhance shareholder value, but that it is often necessary for agency problems to be reduced before managers will begin divestiture programs. Diversified firms that refocus have significantly greater value losses from their diversification policies than multisegment firms that do not refocus. Major events of market discipline usually must occur, however, before managers attempt to undo suboptimal diversification programs, whereas the same events occur only rarely for a matched sample of nonrefocusing firms during the same time frame. Refocusing firms have a high frequency of CEO changes, and also often have new outside blockholders, unsuccessful takeover bids, and signs of financial distress in the period preceding their divestitures. Finally, we find that the cumulative abnormal returns over all of the refocusing-related announcements of a refocusing firm average 7.3%, and that these abnormal returns are significantly related to the amount of value that was being destroyed by the refocuser’s diversification policy.