Divestitures and value creation: does leverage matter?

This article evaluates the extent and sources of value associated with the divestitures of French firms over the period 1990 to 2010. The results show that excess returns are consistently higher when the divesting firm is highly levered. The market reaction is also stronger when the seller's return on assets and interest coverage ratio are low and when the seller is less focused. Using changes in the firm's fundamentals following the divestiture as proxy for market expectations at the announcement date, we find that excess returns are positively related to expected increases in focus, expected increases in the interest coverage ratio and expected decreases in leverage. These results indicate that investors recognize the benefits of divestitures and reevaluate the seller accordingly. However, they only hold for highly levered firms. In contrast, the market reaction to the divestitures announced by low-leverage firms does not appear to be related to the seller's fundamentals. This finding suggests that the determinants of value creation are not uniform across all firms.