The usefulness of segment information in predicting divestitures and the effects of CEO turnover and management incentives divestitures

I. The usefulness of segment information in predicting divestitures . This paper reports results from an empirical study on the usefulness of segment information in predicting divestitures controlling for the use of aggregate information. Based on a large sample of segment divestitures by US multi-segment firms for the period from 1990 to 1995, the results indicate that divestitures are driven by forces originating at the industry, firm and segment levels. Our findings suggest that industry, firm and segment information complement each other in predicting. divestitures. The empirical tests uniformly reject the null hypothesis that segment information is not incrementally useful in predicting subsequent divestitures.; II. The effects of CEO turnover and management incentives on divestitures. In this paper, we investigate the effects of CEO turnover and management incentives on divestitures. Using a sample of 100 firm-year or 117 segment-year divestitures during the period from 1990 to 1995 and a control sample of industry- and size-matched nondivesting observations, we find that divesting firms are more diversified and have poorer performance than their control counterparts in the year preceding divestitures. The difference in the number of business segments between the two groups disappears in the year of divestiture.; Our results from logistic regressions indicate that divested segments that were associated with CEO turnover had poorer performance than those that were not associated with CEO turnover. Controlling for the past performance of divested segments associated with CEO turnover, we find CEO turnover increases the likelihood of divestitures. However, we find no support for the hypothesis that managers time divestitures to take an earnings bath. In addition, we find no evidence to support that the existence of long-term incentive plan increases the timeliness of divestitures. Finally, we find that higher equity ownership by outside directors increases the likelihood of divestitures that increase corporate focus, whereas higher equity ownership either by the CEO or by insiders as a group has no significant effect on the likelihood of divestitures that increase corporate focus.; Taken together, our results suggest that divestitures are not driven by poor segment performance per se rather are driven by new CEOs disposing of segments for which the exit value exceeds the going concern value and the existence of these disposal opportunities follows from prior CEOs falling to divest in a timely manner. These findings are in favor of the management entrenchment hypothesis rather than other competing rationales for asset disposals. In addition, the finding that new CEOs divest segments more regardless of segment performance is consistent with new CEOs bringing in different skills and strategies in managing assets. Assuming that an increase in focus is value increasing, our finding that higher equity ownership by outside directors increases the likelihood of focus-increasing divestitures is consistent with board effectiveness increasing in the equity stake by outside directors. The poor performance of divested segments that were associated with CEO turnover also suggests a stewardship role for segment information in managerial contracts.