Economic policy uncertainty and corporate divestitures

We examine the impact of economic policy uncertainty (EPU) on the propensity of firms to engage in divestitures. We find that EPU is positively related to the likelihood of divestitures in general and cashflow‐generating divestitures in particular. Consistent with the desire for cash being a driving...

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Bibliographic Details
Published in:Journal of business finance & accounting 2024-05, Vol.51 (5-6), p.1120-1160
Main Authors: Frye, Melissa B., Pham, Duong T., Whyte, Ann Marie
Format: Article
Language:English
Subjects:
carve‐outs
Cash flow
Companies
divestitures
Economic policy
economic policy uncertainty
EPU
sell‐offs
spin‐offs
Uncertainty
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Summary:We examine the impact of economic policy uncertainty (EPU) on the propensity of firms to engage in divestitures. We find that EPU is positively related to the likelihood of divestitures in general and cashflow‐generating divestitures in particular. Consistent with the desire for cash being a driving force behind divestitures, we find that underperforming firms are more likely to engage in cashflow‐increasing divestitures. Firms that do not pay dividends and are relatively more reliant on government funding are also more likely to pursue sell‐offs and carve‐outs when economic uncertainty is elevated. We find no evidence that firms prefer staged divestitures (spin‐offs and carve‐outs) over non‐staged (sell‐offs) when EPU is high. Instead, EPU is positively related to the likelihood of non‐staged divestitures suggesting that firms do not wait until uncertainty is resolved to pursue deals with a high degree of irreversibility. Our findings point to EPU as a motivator for poor‐performing firms to shore up cash during times of EPU.
ISSN:0306-686X
1468-5957
DOI:10.1111/jbfa.12747