Comparison of long- and short-term Capital Market Effects of Strategic Divestments

Abstract

Increasing strategic divestment volumes in the European Union provoke the question on post-divestment efficiency. Previous quantitative analyses in divestments usually are restricted to the immediate aftermath of the deal and usually find significant positive cumulative average abnormal returns (CAR). To date the sustainability of shareholder value effects after divestments has not been questioned. Referring back to a previous contingent study on long-term return effects of divestments from the perspective of the divesting corporation, the present study asks for the interaction of short and long-term effects. Both studies develop and apply a novel dynamic methodology of CAR calculation based on time-varying alpha and beta factors and CAR standardization to average period-related daily values. This approach allows calculating and comparing cumulative average returns for unlimited time windows. The study provides an overview on so far research in short term post-divestment abnormal returns and adds the following insights for a sample of 62 companies from the global telecommunication market: (Daily) CARs in the divestment period [-100;+14] exceed (daily) CARs in the prolonged pre-divestment period [-702;-100]. The positive effect starts from day 60 before deal announcement cumulates between day -1 and day 1 after and ebbs off to virtually 0 in the first week after the deal. Short-term CAR values in the divestment period are no general indicator for long-term post-divestment performance. Market expectations in the immediate divestment phase exaggerate significantly. Short-term CAR values after divestments are no general reliable predictors of long-term post-deal performance. However, CARs realized between pre-divestment day – 60 and – 41 are an indicator of post divestment performance in the first two years after the divestment. Several companies perform worse after the divestment than before in the long run. Applying a case study approach, the study shows, that when divestments fail from a shareholder perspective, frequently adverse external influence factors (e.g. governmental regulations or a global recessive corporate development) have been fundamental causes for the divestment decision. This analysis is limited in validity and significance since the size of the sample is rather small. CAR-centred approaches provide no information on the moderating factors codetermining divestment success.