The Impact Of Information Asymmetries And Transaction Cost On The Choice Of Divestiture Alternatives

The dominant theoretical research for explaining divestitures tends to focus on the antecedents and outcomes, but another important aspect seems to be ignored: divestiture alternatives. Research on the divestitures shed little on the different behaviors in the divestiture process and the mechanism of divestiture alternatives. The choice of divestiture alternatives has thus mostly remained a"black box". By neglecting the divestiture process, research has largely failed to explain why firms facing very similar conditions (e.g., bad performance), make different decisions on the choice of divestiture alternatives.This study extends the information asymmetries and transaction cost economics (TCE) rationale to the choice of divestiture alternatives and examine how firms choose between sell-offs and spin-offs. 208 samples of corporate divestiture transactions were selected from Shanghai Stock Exchange on the period of 2002-2008,and then a direct logistic analysis is conducted on firm's viable choices. A statistically significant relationship was found to exist between the divestiture alternatives and these characteristics supporting the theoretical prediction. Because different divestiture method produces variable transaction cost, we found that conditioned on the decision to divest, firms mainly use asset spin-offs in divesting the highly specific assets, firms facing highly environmental uncertainty are more likely to use spin-offs transactions. On the other hand, managers and owners have information asymmetries with respect to the assets in the divestiture and the divestiture firm's diversification strategy. Managers select between two popular implementation alternatives, sell-offs and spin-offs to convert knowledge differences into financial gain. When the restructured assets reside in primary and related business lines, spin-offs most effectively reduce the information asymmetries. When the firm has high diversification, sell-offs best mitigate asymmetries by using market forces to relocate assets to their most productive uses while improving the strategy and performance of the divestiture firm.The dissertation is arranged in five chapters. The first chapter is about the research questions and the structure of the thesis. Then I make a general review on the research literatures related to divestiture alternatives. Chapter 3 provides a theoretical framework for the dissertation and introduces hypothesises. In Chapter 4, an empirical analysis on the choice of divestiture alternatives is conducted. Chapter 5 comes to the conclusions and gives some suggestions.