The effect of corporate divestment on shareholder wealth : the UK experience
This is the first known study of stockmarket reaction to U.K. sell-off announcements. Earlier U.S. studies have found positive market reaction to sell-off announcements. Various of these have aimed to relate the magnitude of marketreaction to factors such as price declaration, completion of agreement and financial strength of divestor. This study also explores the impact of the above factors and their inter-relationships. Typical event-study methodology is used in estimating the size of the unexpected market reaction, the so called abnormal return. Separate analysis of sub-samples is undertaken in this study to help enhance our understanding of market response to corporate sell-offs. Examples of such sub-samples are price/no-price groups and completion/intention groups. This analysis provides explanations for some of the seemingly contradictory U.S. study results. A measure of financial distress, namely the z-score, is introduced to explore the "bankruptcy avoidance" hypothesis. We find a degree of financial distress prior to divestment to be inversely related to abnormal return - a result consistent with market approval for such "distress" sales. Relative size of divested part to parent is also shown to be positively related to abnormal returns. Price declaration seems to be vitally important in generating positive market response. Announcements of completed sell-offs along with the price is even more welcome by the market. Announcement of completed sell-offs with undisclosed price seems to induce market uncertainty and thus negative abnormal returns. Announcement of intended sell-offs with price disclosure as well as our overall sample results both provide statistically significant positive shareholder gains. This, latter finding is in harmony with U.S. studies.