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DIVESTITURES

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What does the paper "Adding by Subtracting: The Relationship Between Performance Feedback and Resource Reconfiguration through Divestitures" focus on?

Draws from performance feedback theory and the resource-based view of the firm
Studies divestiture activity
Argues that resource reconfiguration through divestiture is affected by high and low performance relative to firm's aspirations

What is the "complementary Penrose effect" discussed in the paper?

Firms with increasing performance, especially when they have high performance, use divestitures to free resources for future growth
Impact is higher on the number of partial divestitures than full divestitures
Limited data on divestiture value shows relationships with both increasing and decreasing performance

How does the study contribute to resource-based arguments and performance feedback theory?

Contributes to resource-based arguments by explaining determinants of resource reconfiguration through divestitures
Provides insight on when firms pursue divestiture activity, either full or partial
Contributes to performance feedback theory by analyzing the relationship of aspiration levels with organizational change

What activities does divestiture include according to the paper?

Selling all (full divestiture) or portions of (partial divestiture) existing business units
Includes liquidating substantial asset sets
Involves sell-offs to other firms and spin-offs of units into independent operation

What does greater divestiture activity in a given period imply according to the paper?

Greater divestiture activity means divesting assets with greater financial value and/or undertaking more divestiture events
Divestiture may involve selling all or portions of existing business units
Divestiture can include liquidating substantial asset sets

How does the paper define full divestitures compared to partial divestitures?

Full divestitures involve selling all existing business units, leading to extensive immediate corporate change
Partial divestitures involve selling portions of existing units, allowing more fine-grained adaptation
Both types of divestitures can include sell-offs to other firms and spin-offs into independent operation

What is the main hypothesis the paper explores in relation to divestitures and firm performance?

Divestiture is considered an important element of reconfiguration activities
Divestiture can be used independently or in combination with acquisitions or alliances for proactive change
Divestiture activity includes full divestitures and partial divestitures involving business unit sales and asset liquidation

What is a common perception of divestitures according to most studies on performance levels?

Divestitures are seen as a means to tackle financial and/or competitive problems by
- Selling off
- Spinning off
- Liquidating resources

How can firms with increasing performance utilize divestitures?

Eliminate operations with decreasing strategic importance
Avoid decline stages of industry life cycles
Spin off or sell off resources to facilitate investments or acquisitions
Separate operating units that do not fit well together to free resources for profitable growth

According to Penrose (1959), how does growth occur in firms?

Growth occurs as firms build and expand on their current resources
Growth rates are limited by managerial capacity

How can divestitures help firms extend positive life cycles and avoid decline?

Eliminating operations that are no longer attractive
Freeing resources for growth opportunities
Postponing decline by reinvesting in areas with profitable growth potential

How can divestitures help firms in terms of performance and management capacity?

Increase performance
Free financial resources
Release management capacity
Maintain superior performance trends

What does the performance feedback theory suggest about firm engagement in organizational change?

Influence by performance relative to aspiration levels
Aspiration level as reference point for performance evaluation
Performance gaps can be negative or positive

How do firms with negative performance gaps typically behave according to the performance feedback literature?

Search for solutions to improve performance
Engage in risky behavior
Pursue organizational changes through corporate restructuring

What pressure do managers of firms with declining performance face, and how do they aim to address it?

Pressure to improve performance from external stakeholders
Tend to take risks to close the performance gap
Divestitures as part of the solution set to free up managerial time and raise financial resources

Why are financial resources important for firms with declining performance?

Help address competitive pressures
Provide necessary resources to improve performance
Compensate for constraints in access to external financing

How do managers of firms aim to bridge the gap between current performance and aspiration levels?

Become more willing to take risks
Search for solutions to improve performance
Utilize divestitures as a strategy to focus on key activities and raise financial resources

In the context of performance feedback theory, what is an aspiration level and how does it influence firm behavior?

Reference point for assessing performance
Determines if a performance gap exists
Guides firms and managers in evaluating their current performance against desired levels

What do performance feedback arguments sometimes suggest about firms with positive performance gaps?

Have less incentive to undertake search
Less likely to engage in risks of organizational change
May avoid changes that could help maintain performance increases
Risk averse and less likely to engage in divestiture activities
Face external and internal pressures to maintain increasing performance

What are some external pressures faced by firms with increasing performance according to performance feedback arguments?

Scrutiny by multiple stakeholders
Oversight by analysts providing forecasts
Risk of significantly injuring the company's outlook if aspirations are not met
Limited opportunities for continued growth due to managerial capacity constraints

How can managers use divestitures to tighten the portfolio of businesses and products in firms with increasing performance?

Focus efforts in areas for long-term growth
Contribute to ongoing reconfiguration
Eliminate redundant resources
Free capacity to tackle new opportunities

What is the role of divestitures in firms with increasing performance according to performance feedback arguments?

Contribute to the ongoing reconfiguration of the organization
Help eliminate redundant resources
Free capacity to address new opportunities
Tighten the portfolio of businesses and products

What does the Complementary Penrose Effect refer to?

Free resources for firms to reinvest in new opportunities
Helps firms maintain performance gains

How do partial divestitures differ from full divestitures of business units?

Generate fewer financial and managerial resources than full divestitures
Require more time to implement to disentangle operations being sold
Typically pursued by firms with increasing performance not facing immediate challenges

Why are firms with increasing performance more likely to pursue partial divestitures?

Have more time to respond to pressure
Act proactively to evaluate and divest resources that no longer fit
Take on low to moderately risky divestitures to not endanger performance gains

What types of divestitures are likely to be pursued by firms with declining performance?

Likely to pursue full divestitures
Face immediate needs to raise capital
Financial constraints limit the ability to raise money in capital markets

What is the urgent nature of the position of firms with declining performance likely to lead them to do?

Engage in activities associated with higher disruption and major changes
Risk of bankruptcy and dissolution if not done
Pursue full divestitures to quickly gain substantial financial resources

How does the nature of divested resources vary for firms with increasing and declining performance?

Firms with increasing performance may pursue partial divestitures
Firms with declining performance tend toward full divestitures
Firms with increasing performance have more time to adapt and evaluate resources

What is the impact of performance on a firm's divestiture activity according to Hypothesis 1A?

No support for a greater decline leading to more divestitures
Strongest impact not on full divestitures as hypothesized

What does Hypothesis 1B suggest about the impact of performance on a firm's divestiture activity?

Greater increase in performance leads to more divestiture activity
Strongest impact on partial divestitures as supported by the hypothesis

What may firms with declining performance face in finding buyers for their full units?

CONSTRAINTS IN FINDING BUYERS for full units
Pursue PARTIAL DIVESTITURES for quick money
Sell entire units that no longer suit strategic goals

What impact may firms with both declining performance and lower current performance levels face?

Strong pressures for meaningful changes
Need for reconfiguration and financial resources
Likely to divest full business units
Make fundamental changes to corporate configuration and raise money quickly

What pressures may firms with increasing performance and high current performance levels face?

Strong pressures to maintain superior degree of performance
Divest lower priority parts of corporation
Emphasize emerging opportunities with high potential

What do Hypothesis 2A state regarding the impact of declining performance on divestitures?

Lower current performance has more impact on divestitures
Strongest effect on FULL DIVESTITURES
Hypothesis is NOT SUPPORTED

What type of firms are more likely to emphasize divestiture of partial units according to the given information?

Firms with future potential
Firms that have less need of immediate financial resources
Firms that have the luxury of time to reorganize

What does Hypothesis 2B suggest about the relationship between current performance and the impact on divestitures?

The higher the current performance, the greater the impact of increasing performance on divestitures
There is a strong effect on partial divestitures specifically

What longitudinal data was used in the study focused on the global pharmaceutical industry, and what hypotheses were tested concerning firm divestitures?

The study analyzed data from 1999 to 2009, including 117 public firms.
Data included firms both with and without divestitures and used financial information from Compustat and SDC Platinum.
A panel Poisson model with random effects was employed for the number of divestitures analysis.
Hypotheses tested included:
- H1a: A negative performance gap leads to more full divestitures.
- H1b: A positive performance gap leads to more partial divestitures.
- H2a: Negative current performance is associated with more full divestitures.
- H2b: Positive current performance is associated with more partial divestitures.

What is the independent variable in the study mentioned?

Historical aspiration levels based on average performance (ROA) of the last three years
Positive and Negative performance gaps derived from historical aspiration gap
Count of divestitures, including full and partial divestitures represent significant organizational changes

What is the dependent variable in the study for firms with negative historical performance gaps?

Degree of diversification negatively affects these firms
Declining performance does not significantly influence divestiture activity

What is the dependent variable in the study for firms with positive historical performance gaps?

Firms with increasing performance are more likely to engage in divestitures
Increasing performance has a more pronounced effect on partial divestitures

How do firms with negative historical performance gaps respond to their performance issues according to the study?

Firms with negative gaps and diversification tend to sell parts of their business more
Declining performance doesn't significantly impact divestiture activity
Neither declining performance alone nor in combination with current performance significantly influences divestitures

What was the finding related to divestiture value when analyzing data with performance gaps?

Both positive and negative performance gaps can lead to increased divestiture value.
The observed pattern supports the V-shaped joint prediction of hypotheses H1A and H1B.
Caution is advised in interpreting these findings due to limitations in the dataset.

What are some insights related to control variables in divestiture decisions?

Larger firms are more likely to divest,possibly due to more strategic flexibility
Firms are more likely to divest interdependent segments
Divestiture activity increases with prior acquisition and prior divestiture activity

What are some limitations of the study on divestiture decisions?

Findings might not apply universally as it focuses on one industry
Only focuses on divestitures, ignoring other reshaping methods
Lack of research on direct cause-and-effect between performance and reshaping actions
Limited discussion on the value of divestitures
Need for more research to understand the impact of reshaping actions on company performance

What does the paper by Feldman (2014) focus on regarding legacy divestitures?

Investigates "legacy divestitures"
Considers tension of historical presence of legacy business
Compares post-divestiture performance of firms with and without legacy units

What is the main theoretical contribution of the study on legacy divestitures?

Draws on evolutionary economics and behavioral theory
Explains interdependencies that create value in diversified firms
Highlights differences between managers’ and investors’ expectations

How are legacy businesses characterized in terms of organizational routines?

Feature strong historical path dependence
Routines are tacit and taken for granted
Legacy unit contains oldest routines and key knowledge repository

According to the research, how do legacy businesses in diversified firms demonstrate interdependencies?

Knowledge embedded in legacy business applied to other parts of the firm
Strong interdependencies between legacy business and remaining operations
Historical development leads to strong interconnections

What are the characteristics of a firm's legacy unit in terms of its routines?

Oldest routines in the organization reside in the legacy unit
Key repository of knowledge
Routines underpinning legacy business are taken for granted by organization members

How do newer CEOs differ in their likelihood to undertake legacy divestitures compared to longer-tenured CEOs?

Newer CEOs are more likely to undertake legacy divestitures
Recently appointed CEOs engage in costlier divestitures
Tension between new CEOs trying to grow and respecting company's historical roots

What is the significance of the research findings on legacy divestitures for decision-making processes in companies?

Provide insights on how historical interdependencies create value
Explain decision-making processes followed by managers
Shed light on differences in expectations and outcomes in companies

How does the paper contribute to the understanding of upper echelons theory in the context of new CEOs?

New CEOs may help firms overcome inertia
Risk of undervaluing legacy businesses by new CEOs
Tension between growth and honoring company's historical roots

What are the two key characteristics of organizational routines related to legacy businesses mentioned in the study?

Strong historical path dependence
Tacit and frequently taken for granted by organization members

What are possible reasons for managers to divest legacy businesses?

Managers may underestimate the value of interdependencies between the legacy unit and other segments.
External pressures can influence the decision to divest legacy businesses.
The growth rates for legacy businesses tend to decline as the time to divestiture approaches.

What are the external pressures that drive managers to undertake legacy divestitures?

Legacy businesses concentrated in weak or declining sectors
Disproportionate amount of managers' resources
Lower financial performance compared to newer ventures

What potential consequences occur when a company's corporate name is associated with its legacy business?

Increased likelihood of underestimation in stock market valuations by external constituents
Continued identification with legacy business even after diversification
Discrepancy between primary operations and legacy business contributing to undervaluation

According to behavioral theory, how does undervaluation resulting from a firm's legacy business lead to strategic change?

Undervaluation triggers a performance shortfall below an aspiration level
Stimulus for managers to change firm's strategy, such as through divestitures
Divestitures enhance managerial focus and external perceptions, signaling improved long-term prospects

How do investors typically respond to expectations of long-term benefits from corporate divestitures?

Investors react favorably to anticipated long-run benefits of divestitures
Stock market performance of divesting firms improves upon divestiture announcements
Expect similar improvements in companies undertaking legacy divestitures

What is Hypothesis 1 related to legacy divestitures and stock market performance?

Stock market performance expected to be higher for firms divesting legacy business than those retaining it
Differentiated performance upon announcement of legacy divestitures
Comparison made between divesting and non-divesting firms with similar legacy businesses

Why do corporate divestitures have the potential to positively impact a firm's stock market performance?

Divestitures improve managerial focus by removing slow-growing or underperforming business units
Clarify external perceptions about the firm
Signal to investors that the company's long-term prospects will improve

How can a company's strategic signaling influence investor reactions to divestiture announcements?

Managers signaling a break from the firm's past through divesting legacy business and changing the company's name
Investors responding favorably to expected long-run benefits of divestitures
Investors expecting similar long-term improvements in companies undertaking legacy divestitures

What factors may motivate CEOs to divest legacy businesses according to the provided text?

Expected positive response from investors regarding legacy divestitures.
Pressure to produce strong initial results during a CEO's early tenure.
Aspiration to meet stock market valuations of comparable firms.
Divesting may occur in industries facing declining performance.

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