Acquiring divestors

Abstract

We document evidence that targets that divest assets before acquisitions receive lower offered premiums, experience lower announcement returns, and have smaller transaction multiples than non-divestors. The efficiency of asset divestitures explains these negative effects. Specifically, the effects are more pronounced when the targets divest non-core assets, operate in less competitive industries, or announce divestitures before the Sarbanes Oxley Act. Overall, our findings suggest that asset divestitures increase target firms’ operating efficiency which deters the bidding incentives of potential acquirers.