The role of firm performance in the market reaction to divestiture announcements

Divestitures have the potential to create shareholder value. However, the magnitude of the wealth effect depends on the likelihood of finding more valuable uses for the divested assets and the seller's ability to eliminate negative synergies. Strong performers should have less scope to benefit compared to poor performers. Using lagged excess returns as a proxy for such opportunities, we show that the market reaction to divestiture announcements is significantly higher for underperforming firms.