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Why Hang on to Losers? Divestitures and Takeovers
Author(s) -
BOOT ARNOUD W. A.
Publication year - 1992
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1992.tb04663.x
Subject(s) - divestment , stochastic game , asset (computer security) , business , investment (military) , agency (philosophy) , uniqueness , microeconomics , economics , industrial organization , finance , computer security , computer science , mathematical analysis , philosophy , mathematics , epistemology , politics , political science , law
We study the divestiture decisions of managers who care about their reputations. Managers' divestiture and investment decisions are publicly observable, but managers privately observe signals with respect to the future payoff distribution of investments they have initiated. We establish that in equilibrium there is too little divestiture. These inefficiencies create the opportunity for wealth‐enhancing divestiture‐motivated takeovers. A key result is that only managers of targets with “middle of the road” asset specificity should consider the takeover threat credible. These findings suggest that uniqueness of assets is an important determinant of both agency costs and takeover activity. Our analysis leads to several empirical predictions.