Foreign and Domestic Divestments: Evidence on Valuation Effects of Plant Closings
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Drexel University
Abstract. This study examines the valuation consequences of domestic and foreign divestments by comparing the stock price reaction to announcements of domestic plant closings and foreign plant closings. A domestic plant closing could indicate firm-wide problems and impending firm deterioration. A foreign plant may serve to exploit arbitrage opportunities specific to that plant location. Closing a foreign plant need not signify firm-wide problems. Our comparison of stated reasons for closings supports these propositions. Therefore, foreign plant closing announcements should produce a smaller stock price decline than domestic plant closing announcements. Empirical results indicate a significant negative stock price reaction for domestic plant closings and an insignificant negative stock price reaction for foreign plant closings. Differences in stock price reaction remain after controlling for firm-specific factors. Corporate divestment decisions provide information about a firm's future prospectsand therebyconvey valuationimplications.Literatureon divestment decisions tends to focus on the decision itself ratherthan on its information consequences. Authors have examined managerial and behavioral factors affecting divestments,1the decisionmaking process,2 and motivation for the decision.3 The divestment research in our paper, by contrast, examines the differentialinformationeffects and subsequentvaluationdifferences between domestic plant closings and foreign plant closings by firms headquartered in the United States. *Dr.GeorgeTsetsekosis AssociateProfessorof Financeat DrexelUniversityand his currentresearchinterestsarein theareasof internationalcorporaterestructuring andglobal capitalraising. **ProfessorMichaelGombolais AssociateProfessorof FinanceatDrexelUniversity andhis researchinterestsarein the areasof informationcontentof cashflow and the estimationof time-varyingbetas. We would like to thank David Blackwell, Tom Chiang, Richard DeFusco, Robert Grosse, Tom Hindelang, Bruce Kogut, John Martin, George Philippatos, Fred Phillips-Patrick, Pamela Peterson, John Strong, Sam Szewczyk, MartyThomas, Lenos Trigeorgis, Alan Tucker, James Van Home, Arthur Wilson and three anonymous referees of this journal for helpful comments received on earlier drafts. We would also like to thank Ravi Gopalakrishnan,Laxmi Venkatswamy, and Piyush Mubayi for their computational assistance. The usual disclaimer applies. A preliminary version of this paper was presented at the Annual Meeting of the Eastern Finance Association in Charleston, SC, April 6, 1990. Received: May 1990; Revised: February 1991, June 1991 & October 1991; Accepted: October 1991. 203
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JOURNALOF INTERNATIONALBUSINESS STUDIES, SECOND QUARTER 1992
Any type of plant closing announcement conveys information about the value of the plant being closed. The information content of a foreign plant
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