Abstract

Recently, the topic of internal corporate governance has been the focus of many studies by scholars and practitioners. Specifically, researchers have studied the effects of board structure on shareholders' wealth in the context of different financial decisions, such as green mail, management buy-out, bankruptcy, and mergers and acquisitions. However, the differences in the internal governance of divestitures, usually undertaken to reverse a merger activity and increase the firm's focus on its core business, have not been empirically investigated. This study examines the market reaction to divestiture decisions characterized by spin-offs and equity carve-outs. It further moves to analyze the determinants of such reaction by focusing on firm specific variables, as well as those characterized by the board structure of the divested firm. To our knowledge, this latter aspect of divestiture decisions has not been comprehensively analyzed in the literature. The results show that only shareholders of spin-off firms realize significant abnormal returns at the announcement date. There is some support for the hypothesis that states that carve-out firms have higher needs for external financing. The belief that carve-out firms have better access to capital markets is not empirically supported. Also, market reactions to divestitures, which are characterized by smaller boards, are found positive and larger, supporting the efficiency argument of the firm's internal governance. Moreover, a higher voting control by outside directors was positively related to the abnormal returns of the divestiture sample. Spin-off firms with higher dividends realize lower returns at the announcement of a divestiture. Outside board directorships are associated with positive abnormal returns for spin-off firms. In addition, CEO-chairman duality decreases shareholders' wealth in spin-off firms.