Divestiture Capability and Firm Performance

Patia McGrath, University of North Carolina

Academy of Management, November 2016

Abstract: In order to sustainably and profitably grow, firms must, at times, shrink. Although much scholarly attention has been directed towards scope expansion, and the role that scope expansion capabilities may play in firm performance, less is known about the process of scope reduction. My research explores whether some firms are more successful than others at the scope reduction process of divestiture, and, if so, whether divestiture capability may be the basis of any such performance heterogeneity. In addressing these questions, the issue of how divestiture performance should be evaluated is considered, as well as the impact of several key factors on the firm’s divestiture learning process. Additional sources of divestiture capability, beyond the firm’s own, that may be leveraged to advance firm divestiture performance are also investigated. Further, the potential interplay between the firm’s divestiture capability and its scope expansion capabilities is explored. These questions are studied using a large sample of cross- industry and cross-border divestitures originating from U.S. firms during a twenty-one year period.