Divestitures as a tool to improve business performance of nonfinancial companies

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ФЕДЕРАЛЬНОЕ ГОСУДАРСТВЕННОЕ АВТОНОМНОЕ ОБРАЗОВАТЕЛЬНОЕ УЧРЕЖДЕНИЕ ВЫСШЕГО ОБРАЗОВАНИЯ

«НАЦИОНАЛЬНЫЙ ИССЛЕДОВАТЕЛЬСКИЙ УНИВЕРСИТЕТ

«ВЫСШАЯ ШКОЛА ЭКОНОМИКИ»

Факультет экономических наук

МАГИСТЕРСКАЯ ДИССЕРТАЦИЯ

по направлению подготовки Финансы и кредит

образовательная программа «Корпоративные финансы»

DIVESTITURES AS A TOOL TO IMPROVE BUSINESS PERFORMANCE OF NONFINANCIAL COMPANIES

Жукова Екатерина Олеговна



Introduction

Along with mergers and acquisitions, divestiture is a tool for optimizing the structure and improving the efficiency of the company. According to IMAA in 2017 there were 50, 130 M&A deals with a total volume of just over 3.5 trillion USD dollars implemented in the world. Currently there is an increase in the number of M&A deals in the world for four years in a row, amounting to 28.9% growth from the value of the year 2013 and the trend toward growth continues throughout the observed period of study. Among 10 largest mergers and acquisitions in the world three transactions took place in 2015-2016. “M&A Statistics - Worldwide, Regions, Industries & Countries.” 2016. IMAA-Institute. March 16, 2016. https://imaa-institute.org/mergers-and-acquisitions-statistics/. The prevalence of the former years in the list of the largest deals justifies the unabated interest for M&A research.

Yet being officially a part of M&A market, divestitures are not commonly analyzed in the scientific literature. According to the scientific work search system Science Direct, in 2017 there were 4, 004 works published under the keywords “Merger” or “Acquisition”. At the same time, under the tag "divestitures", the search query produces only 213 works. However, search with the keywords “Spin-off”, “Split-off” and “Carve-out” results in 133, 9 and 13 articles accordingly. Therefore, according to Science Direct scientific work aggregator the approximate total amount of articles analyzing divestitures and its kind equals to 368 articles. The ratio remains constant over a long period of time despite the increasing popularity of divestitures.

In contrast to the low popularity of scientific works which analyze the effectiveness and impact of divestitures, their share as a percentage of total M&A activity ranges from 33 to 43 per cent in 2014-2016. https://www2.deloitte.com/content/dam/Deloitte/xa/Documents/corporate-finance/us-dcf-divestiture-ma-news-q1-2016.pdf Thus, despite the popularity of this instrument and its potential effectiveness, to date it has not been sufficiently explored in scientific papers. However, corporate research shows that companies that are actively involved in both acquiring and divesting create 1.5 to 4.7 percentage points higher returns than those involved in acquiring only. «Divestitures: How to invest for success | McKinsey & Company». б. д. Просмотрено 4 февраль 2018 г. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/divestitures-how-to-invest-for-success.

The lack of scientific research on the topic causes trouble for managers and executives. For better decision-making upon the choice of the method and the need for the implementation of divestiture it is important to understand how different types of asset allocation affect the market reaction and value creation for the company. The development of the market for mergers and acquisitions leads to an increase in the number of divestiture transactions and consequently to the growing need to analyze the determinants of the effectiveness of this type of transaction to ensure the success and further development of the divestitures market.

Due to economic fluctuations and internal processes, companies are forced to optimize their activities to gain competitive advantage. Divestiture is one of the strategies for allocating the company's capital, which allows it to direct the assets to key areas of business. According to EY report “Global Corporate Divestment Study 2018.” Accessed April 30, 2018. https://divest.ey.com/., the management indicates the following as the main reasons influencing the decision on divestment stronger than others: macroeconomic volatility (76%), risks or opportunities related to technological changes (67%), geopolitical uncertainty (56%), shareholder activism (38%). At the same time, the greatest success in the asset sale is achieved by those companies that carry out divestments due to technological changes, not macroeconomic instability.

The number of divestiture transactions grows, as well as the importance and need for research on this topic. Almost half (43%) of the companies in the world are planning to implement either type of divestiture within the next two years. 88% of executives believe that advanced analytical tools allow them to make on-time and quality decisions on divestment. “Global Corporate Divestment Study 2018.” Accessed April 30, 2018. https://divest.ey.com/.

During the research period of 2007-2017 more than half of all transactions took place in the USA and Canada, 30% in Asia and Pacific regions and 13% in Europe. 13% of all transactions during the period were performed in the BRICS countries.

According to Thompson Reuters, the total volume of mergers and acquisitions transactions including announced but not closed deals involving Russian companies (both inside Russia and abroad) for three quarters of 2017 increased by 43% compared to the same period in 2016. For nine months of this year the total amount of transactions was equal to $18.2 billion compared to $12.8 billion in 2016. In 2015, 2014 and 2013 the total amount of transactions amounted to $10.3 billion, $16.3 billion and $38.2 billion respectively. Thus, for three quarters of this year the market has shown the best result since 2013. The fuel & energy and raw materials sectors account for 86% of the total M&A market in Russia. “Thomson Reuters: объем иностранных инвестиций в российские компании достиг максимума за четыре года.” 2017. Россия и СНГ | Thomson Reuters. October 6, 2017.

Scientific papers mainly focus on the USA and mature economies, while emerging markets seem to be poorly explored. There are not so many articles (Hanousek, э2008, Holan, 2006, Ezhova, 2017) showing the post-deal performance of companies from emerging markets and most of the existing articles are not published in well-known and trustworthy scientific journals.

Deloitte's Divestiture M&A News report says that Asia & Pacific region and emerging economies drive divestiture activity. Significant Chinese activity resulted in Asia-Pacific buyers closing almost 40% of the divestiture deals in 2016. Such an increase in the number of transactions and the growing importance of developing economies lead to the need for research on the effectiveness of divestitures in emerging markets. Interest in divestitures in the context of emerging markets increases due to differences in financial and economic indicators of the company's development in these countries noted in previous empirical research.

Due to the growth in the number of domestic and international divestiture transactions in emerging markets one can speak of the growing relevance of this work which analyses the influence of divestitures by nonfinancial companies on market reaction and value creation. The majority of studies that examine the divestiture effectiveness concentrate their attention either on the US or developed markets. In contrast to existing research papers the following work examines the effect of divestiture on the performance of the parent companies from emerging economies. Meanwhile, we do not limit the country of neither target, nor acquirer. Aside of the focus on emerging markets in this paper we investigate the effectiveness of divestitures in innovative industries.

Our main objective was to unveil the key drivers of value creation during divestiture, thereby enabling analysts and academics, as well as corporate decision makers to better understand stock market reaction and possible future value of the divestiture. We aim to answer the following research questions: Do divestitures enhance corporate value on emerging markets? Is there a relationship between the parent company performance and the core industry in which it performs? Do cross-border divestitures bring more benefit than the domestic ones? Does the crisis affect the effectiveness of divestiture? Is divestiture of non-core business perceived positively? The empirical findings of this paper could be useful for companies when taking a decision on whether to make a divestiture or not.

Summarizing the above mentioned, the contribution of this work to the existing literature is in the analysis of the new determinants and conditions surrounding the announcement of the divestiture. Thus, we can highlight the following features of this research, distinguishing it from existing ones:

· The research is conducted on a sample of divestitures announced by companies, which are based in emerging markets. It has been discovered that market reaction in emerging markets is on average similar to the market reaction in developed countries;

· A new determinant of the effectiveness of divestiture deals has been introduced: a variable responsible for the innovation of the industry in which the company operates. The analysis showed a positive market reaction to divestiture announcement if the parent company operated in one of the innovative industries;

· The study also contributes to the existing literature by the inclusion of recent years in the sample.

Apart from that the value creation has been discovered in divestiture deals' announcement for non-core businesses and during the crisis.

Here and thereafter the object of the study - the effectiveness of divestiture deal - is understood as the reaction of the market to the announcement of the transaction. Company performance is used as a synonym of the market reaction to divestiture deal announcement.

This paper is organized as follows: Section 2 provides a literature review on the effectiveness of divestitures on different capital markets. Section 3 defines the methodology and suggests the hypotheses. Section 4 describes the sample selection procedure. Section 5 provides a discussion of the results, and Section 6 concludes the study. The proofs of propositions are confined to the appendix.

Literature review

Restructuring of business portfolios through divestitures has long been of interest to many researchers specializing in corporate strategy and finance. Studies can be divided into two types: those that study the effectiveness of divestitures in general (Chen, Guo, 2005; Zhou, Li, Svejnar, 2010) and those that analyze the impact of a certain type of asset allocation, e.g. spin-off, split-off, equity carve-out, etc. (Chemmanur, et al, 2014; Prezas, Simonyan, 2015).

Revenue of the company after spin-off increases by 7.2% annually (Chemmanur, et al, 2014). However, the effect of divestment is not ambiguous. According to McKinsey & Company research after the first year after the divestiture the parent-company performance relative to their benchmarks ranges from +37 to -100 percent of shareholder return. The parent company is more likely to outperform when the divested company shows a positive trend. “Divestitures: How to Invest for Success | McKinsey & Company.” n.d. Accessed February 4, 2018. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/divestitures-how-to-invest-for-success. Divestment is an effective measure to fight the stock price volatility. (Friberg, Romahn, 2015)

Researchers are interested in the reasons for divestiture: why do large companies' managers want to allocate a part of the company's assets despite past merger deals? The evidence shows that one of the main reasons for this is the willingness to enhance their focus on core operations. (Comment and Jarrell, 1995, Cooney et al., 2004; John and Ofek, 1995; Daley et al., 1997, Sheng Huang, 2014). Commonly cited economies of scale are not realized when the managers of the parent company are distracted. (Comment and Jarrell, 1995; John, Ofek, 1995). Low efficiency of management and decentralization of the focus are the reasons for the company to divest a non-core asset to improve the efficiency of the business. (Berger, Ofek, 1995). The willingness to enhance the focus often occurs when the divested asset is unrelated to the core business of the parent company. The evidence shows that the remaining assets become more profitable after the divestiture. (John, Ofek, 1995). In their study Hite and Owers (1995) identify the three main reasons for a divestiture: facilitation of a merger, focus on operations and legal or regulatory difficulties. At the same time the researchers say that the latter reason for a spin-off leads to negative abnormal returns. The scientific literature finds evidence that extremely diversified companies are traded on the market at a discount (Rajan, Servaes, Zingales, 2000). Thus, divestiture can be used as a tool aimed at increasing the value of the company in the long term.

Researches find efficiency motive as a reason to perform a divestiture. (John and Ofek, 1995; Hite and Owers, 1983), Strongly diversified companies are on average more likely to divest assets with low operating efficiency. (Chen, Guo, 2005). Spin-offs improve the efficiency and overall factor productivity of the company. As a result, spin-off increases the company's productivity, but it does not happen instantly. (Chemmanur, et al, 2014). If a divested company is small and is operating at the same industry as the parent company, the asset sell-offs are more likely to occur. Otherwise spin-off or equity carve-out will be a more expectable scenario. (Chen, Guo, 2005). Evidence shows that undervalued companies are more likely to divest assets in the form of a spin-off. (Prezas, Simonyan, 2015)

Management increase the number of divestitures during the crisis desiring to enhance the efficiency of the core business. In the case of recession, the company's strategy must include an action plan that allows the company to go through a phase of economic decline with minimal costs. Studies show that during the national crisis foreign companies are slightly changing their policy with respect to divestments. At the same time, national companies, regardless of form of ownership, reduce divestments during the crisis. The research based on the sample of the companies from emerging market showed that the financial crisis has little impact on the divestiture of foreign companies. During the crisis, the M&A activity is shrinking, however, the number of divestitures is reduced by a larger rate (Zhou, Li, Svejnar, 2010). Companies with high financial leverage are more prone to divesting assets to avoid or reduce the possible costs that may arise as a result of financial instability (Lang et al, 1995). However, some companies may not be willing to sell assets since a large number of sellers and a small number of asset buyers during a crisis reduce the asset price (Shleifer, Vishny, 1992). A similar situation has been observed during the global financial crisis of 2008, when researchers returned to the study of this topic (Diamond, Rajan, 2009). Fire sales explanation of asset sales supports lower market reaction to divestment announcements during periods of industry-wide or economy-wide distress (Finlay et al, 2016).

There are two most common methods used in analyzing the effectiveness of a divestiture deal: the event studies and accounting studies. The first one is based on analyzing the market reaction to divestiture announcement, while the second one examines the financial results of a divesting company before and after the divestiture in order to understand how operating performance has changed after the deal has been performed.

The event study method is the most commonly used one (Hite, Owers, 1995). Usually, researchers use cumulative abnormal return (CAR) to calculate the market reaction resulting the deal, but cumulative average abnormal return (CAAR) (Rosenfeld, 1984; Clubb, 2002) and CAR modified by book measures could be found in scientific papers as well. Generally, the stock market reaction method indicates the positive reaction to divestiture announcement. Regardless the variations of the event window, the size of the divested asset or time period the cumulative abnormal return vary between 0, 04-2, 8%.

In contrary to the previous method the accounting study measures the long-term effect of the divestiture on company's performance (John, Ofek, 1995; Chemmanur, Yan, 2003). In their works the researchers use two types of accounting measures of performance to identify the effect of the divestiture on both the parent company and the divested unit. The profitability-based measures used by the researchers include operating margin, return on assets, return on equity, etc. Performance-based studies measure the effectiveness through cash flow indicators (such as operating cash flow to the total market value of a firm, book value of a firm, sales, etc.).

Hypotheses and methodology

Hypotheses. The key objective of this paper is to examine the performance of divestiture deals on emerging markets. Previous research papers showed positive results of the company performance after the announcement or close of the divestiture deal (Dasilas, Levetnis, 2017; Hwan Shin, 2008; Jain, 1985; Hite et al., 1987; Lang et al., 1995). Some research papers show there is a slightly lower positive market reaction on the divestiture deals in emerging markets. Focusing the analysis on the companies from emerging markets and following previous research results we suggest that despite the possible information asymmetry and imperfect institutions divestiture deals affect the company performance positively. Announcement of divestiture deal is perceived by the shareholders as a signal of confident decision that will benefit the company and bring prosperity to the divestor. Therefore, we put forward the following hypothesis to be the first:

H1. Divestiture deals positively affect the parent company performance in emerging market

In this study we also control the factors that may have a significant influence on the company performance due to a divestiture deal. The impact of the following factors will be analyzed: (1) cross-border vs domestic deals, (2) business similarity between the parent company and the divested company, (3) crisis of 2008, (4) innovativeness of the industry of the divesting company.

(1) Cross-border vs domestic deals

In pursuit of diversification, companies often buy foreign assets to expand their geographic coverage. As a result, management of a company may face different business mentality, legislation and market rules. M&A studies show that informational asymmetry, regulatory and cultural differences destroy the company's value and deter the operating improvements caused by synergies due to geographic diversification (Moeller and Schlingemann, 2005). Evidence shows that cross-border asset sales yield higher abnormal returns to the parent company than domestic sales (Borisova et al, 2013). Following the evidence, we believe that concentrating the company's attention on one market increases the efficiency of the company and therefore we put the following hypothesis forward:

H2. Cross-border divestiture deals yield higher abnormal returns to the parent company than domestic divestiture

(2) Business similarity

The increase of focus on core operations is one of the main reasons for a willingness to perform a divestiture deal. (Cooney et al., 2004; John and Ofek, 1995; Daley et al., 1997). Because of the diversification motive and previous M&A activity, companies suffer from the distraction of focus and extremely broadened portfolio of assets. The distraction of managers of the parent company from core operations may be the reason for bad company performance, therefore the management or owners of the company come to the decision to divest the burdening asset. Most of the studies find evidence of the positive impact of focus motive of the divestiture deal on the company performance (John, Ofek, 1995). Following John and Ofek we suggest:

H3. If the parent company and the divested company operate in different industries the divestiture will affect the parent company's performance positively

(3) Crisis

The effectiveness of transactions made during or immediately after the crisis is influenced by diverse factors. On the one hand, divestment is a way to increase focus on the company's most profitable businesses and the crisis is the trigger to shed distressed assets. In this case companies receive an opportunity to reduce financial constraints and stabilize the company's flows. On the other hand, transactions conducted during or immediately after the crisis tend to occur at a lower price, which adversely affects the company's cash. Assets sold during a crisis are usually sold at a price below the non-recession time. Moreover, one can assume that companies divest assets not because they are ready for this, but because they are forced to make a transaction in order not to go bankrupt (Zhou, Li, Svejnar, 2010). Predicating upon the evidence from (Finlay et al, 2016) study we suspect that the effectiveness of the divestiture deal during the crisis of 2008 has the tendency to lower:

H4. The deals performed during or right after the crisis have negative impact on parent company market value

(4) Industry

We analyze whether there is a significant difference in the effectiveness of divestiture deals across industries. To do so, we divide the industries into innovative and traditional and study the existence of a difference in the effectiveness of transactions for parent company in such industries. Among the scientific papers the search for difference in the effectiveness of the divestiture across industries seems to be a new topic. However, some researchers (Miyazaki, 2006; Shera, Yang, 2005) test the hypothesis of effectiveness of M&A deals on the samples of innovative companies. Other articles (Hite et al, 1996) revealed that acquisitions and divestments affect company's innovation after the transaction.

To determine whether there is a relationship between the divestiture effectiveness and the innovativeness of the parent company, a dummy variable was introduced. According to Thomson Reuters' 2015 State of Innovation Report Friedman, Lauren F. n.d. “The IT Industry Is out-Innovating All Others by a Longshot.” Business Insider. Accessed April 30, 2018. http://www.businessinsider.com/most-innovative-industries-2015-5. and study of Ushijima, 2009 industries were divided into two groups: innovative and traditional. In these studies, the measurements of innovation were R&D intensity or patent-filling. Combining these two ways of measurement we determined the following innovative macro industries (INOV=1): Healthcare, Energy and Power, Materials, High Technology, Industrials and Telecommunications.

We believe that in innovative industries decisions are made faster than in traditional, more conservative industries. As stated in the EY report, 56% of companies indicate they have held onto asset too long when they should have divested. Thus, without making divestment earlier, companies in traditional industries are missing the right time and allow a decline in the value of the asset, which later affects how parent company benefits from the sale. At the same time, innovative industries receive more financing due to a greater inflow of cash into the growing sectors. Thus, companies from innovative industries can allocate more funds for a thorough analysis of the results of a potential divestiture.

Taking into consideration the above mentioned and following the results of the research made by Benou et al (2008) we expect the see the difference in divestiture effectiveness for the parent company in innovative and traditional industries:

H5. Divestitures bring more benefit to shareholders of innovative companies than to traditional company's shareholders

Methodology. In this paper we examine the effects of divestiture deals through the event study method and try to reveal the determinants of divestiture performance. Using event study method, we will examine the impact of an average divestiture transaction on the value of the firm through the market performance of the firm. The accuracy of the analysis comes from the fact that the effective and rational market immediately reacts on any company event. MacKinlay A.C. (1997). «Event studies in economic and finance». Journal of Economic Literature, Vol. 35, рр. 13-39. Therefore, we expect that any publicly-available information, even privileged one, will be immediately absorbed by the market and be reflected by the stock prices.

In the following paper three methods have been used to calculate cumulative abnormal return (CAR): market model, market adjusted return model and a simplified abnormal return model.

In the market model the normal returns are generated using the following formula:

, (1)

, where is the normal return of the stock on day t; is the return on a market index on day t; is the measure of volatility of the stock in comparison to the market; is the mean return that is not explained by the market; is the statistical error (); t is the estimation period.

The abnormal return is then measured by the following formula:

, (2)

, where is the actual return; is the event window.

The corresponding market index is used to measure market return for each country. The day of the deal announcement is the event day (day 0). We employ the 15-day event window, which includes 7 days before the event, the event day (=0) and 7 days after the event. We take 100 trading days (-120;-20) of the estimation period prior to the event window to measure the normal return of the stock. We leave 20 days before the announcement day to eliminate the effect of possible insider trading, which is typical for emerging markets.

We also calculate abnormal returns using the market-adjusted model, defined as:

AR_it=R_it-R_mt (3)

In the simplified abnormal return model we use the following formula to calculate AR:

AR_it=R_it- (4)

The cumulative abnormal return is measured similarly in all mentioned methods using the following formula:

(5)

Unless stated otherwise the for all hypotheses is:

(6)

To check with a certain level of confidence that the residuals are significantly different from zero we use the standard test statistics:

, where , m is the length of the event window.

To check the hypotheses H2-H5 the regression analysis has been used. The following model has been introduced to the study:



, where SIML is a dummy variable that equals 1 if the parent company and the divested asset have different primary SIC code and 0 otherwise, CROS is a dummy variable that equals 1 for cross-border deals and 0 otherwise, INOV is a dummy variable that equals 1 for parent companies that belong to innovative industry and 0 otherwise, CRIS is a dummy variable that equals 1 for deals that occur during the crisis and 0 otherwise. The hypotheses have been checked on two event windows: a 3-day window, including days -1, 0 and 1 and a 15-day window

Following the assumptions of the classical linear regression model we say that the errors of disturbances have the same variance across all observation points. To avoid possible heteroscedasticity problem and improve upon OLS estimates we use heteroscedasticity-consistent standard errors (HCSE) (or Eicker-Huber-White standard errors).

Data and sample characteristic

Sample construction. The study is based on a sample of divestitures that happened between 2007 and 2018 and fit in a category of completed deals. According to the IMF definition and classification of the emerging markets we examine the deals in the following countries: Argentina, Bangladesh, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, and Venezuela. We used Thompson Reuters database to identify the sample for the future analysis and require the following (1) the company that implement the divestiture must be a public company, so that the share price performance is available, (2) both the acquirer and target are non-financial companies, (3) the divestor is from one of the countries listed above (emerging market), (4) the deal value must be more than $100 million and deal intensity excess 10% of market capitalization at time of completion, (5) all essential data is available.

The criteria listed above allowed us to gather the list of 537 deals.

In the next step we eliminate the deals in which the divesting company performed more than one deal during the estimation period. This allows us to avoid the effect of other transactions on the market reaction in the reviewed period and gives us a sample of 416 divestiture deals.

These tables present summary statistics for a sample of divestiture announcements by public firms from 2007 to 2018. The sample consists of non-financial firms from emerging markets according to IMF.

Descriptive statistics of data. Panel A of Table 1¹ presents the distribution of the 416 divesture deals across the 12 years. In general, there has been an increase in the number of divestitures in recent years. However, the exception is the year 2015, which seems to have attracted the majority of divestitures (74 deals), leaving years 2014, 2016 and others behind.

Panel B of Table 1¹ represents the distribution of the 416 deals across the country of parent firm. The sample is dominated by deals, the parent company in which is based in China (219 deals (52.6%)), followed by India, Brazil, South Africa and Russian Federation, or the BRICS countries. Since there was no country restriction on the origin of the divested asset, 20% of the deals involved assets from advanced economies (USA, UK, EU etc.) and less developed economies (Nigeria, Uruguay, Namibia etc.). Most often, transactions were made in the following industries: Materials, Industrials, Real Estate and Energy and Power. The least popular are Media and Entertainment, Retail and Consumer Products and Services.

In the final sample, 31 deals (7%) were announced during the crisis (2007-2009). 85 deals (20%) were cross-border transactions, in other words divestor and target companies were headquartered in different countries. 166 transactions (40%) were carried out by companies operating in different sectors of the economy.

Empirical results

CAR surrounding the announcement of divestiture

To test our hypothesis that the announcement of divestiture deal has a negative impact on the company effectiveness, we calculated CAR using three different methods mentioned above: market model, adjusted market model and simplified model. To analyze CAR dynamics, we used two observation windows: a 3-day window (-1;1) to consider the immediate or short-term impact and a 15-day window (-7;7) to analyze the effectiveness of a deal over time, when the emotional behavior of investors subsides.

Table 3² shows the results from the event study analysis employing the market model, the adjusted market model as well as the simplified model. Evidence shows that the mean 15-day announcement-period abnormal returns for parent company are positive (2, 9%) and statistically significant at the 10% level. The 3-day event window analysis as well shows positive (1, 8-2, 3%) and statistically significant at 15% level mean market reaction. These results indicate that parent company shareholders of sample firms experience wealth gains from divestiture deals announcement. This evidence is consistent with findings of previous empirical studies (Hite et al., 1987, Lang et al., 1995; Benou et al, 2008; Finlay et al, 2016; Borisova et al, 2013). Although the market model shows negative impact of the divestiture, these results are not significant and do not allow us to make any conclusions. Thus, we can say that hypothesis that divestitures in emerging markets lead to positive market reaction has been justified.

Comparing the results of this study with the results presented in previous research papers (presented in Appendix 1) we might say that, on average, market reaction on divestiture announcement in emerging markets is about the same to CAR in developed economies. This might be explained by a big proportion of divestitures with parent company originating from China, which economy becomes more mature, open and attractive to external investors.

Table 3. Parent company CAR surrounding the announcement of divestiture in emerging capital markets



The table presents summary statistics for cumulative abnormal returns (CAR) of a sample of divestiture announcements by public firms from 2007 to 2018. The sample consists of non-financial firms from emerging markets according to IMF. The table summarizes the results of the three methods of CAR calculation. Medians are reported in brackets below means. **-denote significance at the 5% level, *-denote significance at the 10% level.

Regression analysis. Tables 4, 5 and 6 ¹ show the results of the regression analysis for market model, adjusted market model and simplified model respectively. Evidence shows that deals performed during or right after the crisis of 2008 were on average less effective, than divestitures performed during the times of stable or growing economy. Adjusted market model results showed that cumulative abnormal returns of the company stocks fall by 5, 1 % and 11, 6% in a 3-day and 15-day period respectively at 10% significance level. The result is consistent with the hypothesis H4 offered previously.

Increase of the company focus on its main business (in other words, the divestiture of a non-core asset) positively affects the profitability of the company both for short (2, 3%) and long-term (3, 3%) period of time. This is explained by the fact that investors in emerging markets understand the importance of focusing the attention of the company's manager on key activities. We also believe that when deciding whether to invest in a company, investors are guided by the degree to which they understand the industry where the company operates. At the same time, a non-core business may not always be understandable to investors, and the sale of such a business might be a positive sign for shareholders. Our finding is consistent with the results of previous research papers (Dasilas, Levetnis, 2017).

The industry innovativeness showed a positive impact on CAR. Innovative industries bring shareholders a short-term (3-day) value increase of 2, 7% which is statistically significant at the 10% level. On the 15-day period, there was no significant impact of the company's innovativeness on abnormal returns. Thus, the hypothesis about the positive influence of the innovativeness of the company's core industry is confirmed in short-term. As mentioned earlier, we associate this with an on average faster decision-making about the need for divestiture in innovative industries, which makes it possible to carry out such a transaction at a right time. Thus, companies allocate assets at a time when the transaction will bring benefit to the company. Realizing this, investors react positively to the divestiture, believing in the further successful development of the parent company.

In the following study market model showed no significant results neither in CAR, nor in regression analysis at any reasonable level.

There are no significant results supporting the hypothesis that cross-border divestiture deals show better performance than domestic. Therefore, we do not have grounds to confirm or reject hypothesis H2.

Table 4. Regression analysis for parents' market model cumulative abnormal returns on divestiture announcements

Table 5. Regression analysis for parents' adjusted market model cumulative abnormal returns on divestiture announcements



Table 6. Regression analysis for parents' simplified model cumulative abnormal returns on divestiture announcements

Notes for Tables 3, 4 and 5: The dependent variable is either the 3-day CAR (-1;1) or the 15-day CAR (-7;7). Crisis is a dummy variable that takes 1 if the divestiture deal happened between mid-2007 and 2009 and 0 otherwise. Similarity is a dummy variable that takes 1 if the parent company and the divested asset have different primary SIC code and 0 otherwise. Cross-border is a dummy variable that takes 1 if parent company and divested asset have different countries of origin and 0 otherwise. Innovativeness is a dummy variable that takes 1 if parent company operates primarily in one of the innovative industries and 0 otherwise. T-statistics are computed following White (1980) to adjust for heteroskedasticity. *, **, *** denote statistical significance at the 10%, 5% and 1% level respectively.



Conclusion

The purpose of this paper is to test whether there is a significant market reaction to the divestiture deal announcement in emerging markets. In other words, we tested the hypothesis that divestitures create value for shareholders of a parent company. Such study will help managers of the parent company justify the need and timing of divestiture deal and create value for shareholders.

In contrast to other studies on market reaction following the announcement of divestiture deal we use event study method to assess the impact of divestiture on company performance in emerging markets.

Based on the sample of 416 divestiture deals in which the parent company originated from emerging market (definition according to IMF) over years 2007-2018 we obtained significant results on the performance of divestiture deals. The event study analysis of cumulative abnormal return (CAR) for 3-day window around announcement day showed statistically significant growth of mean parent company capitalization from 1, 8% to 2, 3%. On a slightly longer, 15-day event window statistically significant CAR of a parent company is equal to 2, 9%. Thus, it can be said with certainty that divestitures create value for shareholders and considered positively as a tool to improve business performance of the company.

Despite the results of the study, some divestitures are unsuccessful and affect the effectiveness of the company negatively. We tried to find out what makes divestitures more effective or less. We found evidence that the crisis in the economy reduces the effectiveness of divestiture, while focusing on a key area of business leads to a statistically significant increase in the value of the company.

We as well discovered a factor that was not analysed earlier in scientific papers on emerging markets. We have found out that companies belonging to the innovative industry, on average, make more efficient divestitures. At the same time, despite the evidence from other scientific papers, we do not have statistically significant results showing the effect of the announcement of cross-border deals on the company value.

The main contribution of this work is the analysis of the effectiveness of divestiture deals in emerging markets. At the moment, divestitures on emerging markets are poorly studied, therefore the relevance and the contribution of the work grows. As well the interest in effectiveness of transactions in innovative industries analysis arises because of the low level of coverage. The findings of this paper are valuable and can be used for further research. Managers who make decisions within the framework of the company's value management should take into account the results of this work when deciding on need for divestiture and choosing the optimal timing. The issues related to the contribution of corporate management and influence of intellectual capital on the effectiveness of divestments remain open to study.

shareholder divestiture market manager



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