Industry divestiture waves: How a firm's position influences investor returns

Due to the "opaque" nature of divestitures, investors face considerable uncertainty in evaluating divestiture decisions and thus may look to the firm's social context in terms of the pervasiveness of divestiture activity within an industry to infer the quality of the decision. Specifically, we propose that a firm's position in the industry divestiture wave conveys information about whether or not managers are imitating their industry peers, which in turn will influence how investors perceive and assess the quality of the decision and its likely performance consequences. Consistent with this theoretical argument, we find that the relationship between divestiture position and stock market returns exhibits a U-shaped pattern, with divestitures that occur at the peak of an industry divestiture wave generating the lowest stock market returns. We also find that industry characteristics (i.e. munificence) reinforce the effect of position in wave on investor response. Our study is the first to incorporate the role of the firm's social context, in terms of the pervasiveness of an activity, as an important factor that influences how investors perceive and evaluate divestiture decisions.