Therefore, it can be said that a concept of divestiture is the opposite of an investment. The concept of divestiture is very much different from the concept of personal finance. Under the concept of personal finance, the investors sell out their business shares so as to meet their personal objectives. The major scope of a divestiture is that it allows the concentration of business resources in the market, and this process makes the business more profitable. This literature review tends to evaluate the positive wealth effects of divestitures. Motives behind divestitures Evidently, divestiture processes have been gradually increasing since 1990s. According to Kiymaz (2006), the gradually increasing divestiture can be clearly attributed to widespread corporate restructuring activities. The Author points out that the volume of divestitures has increased since 2,057 in 1993 to 3,134 in 1998. Kiymaz also argues that divestitures are the outcomes of a firm’s interest to create and preserve its shareholder wealth and it does not always symbolize the failure of a firm. A divestiture effectively refreshes a business organization and it assists the firm to enter the next phase of growth. The ultimate objective of every business firm is its further expansion and thereby increased profitability. A running business may have thorough knowledge regarding its key areas of strengths and weaknesses. Hence, an organization normally intends to restructure its strategies and concepts in order to address its weaker business areas and thereby focus more on potential growth sectors. In the opinion of Kiymaz (2006), spin offs and sell offs are the two effective techniques for a successful divestiture. Under the spin off methods, a company distributes all the common stocks to its existing shareholders with intent to create a separate publicly traded company. The author asserts that the divested asset is sold to another firm according to the concept of sell off. A spin off does not release its assets out of the company boundaries; instead, it retains within the hands of its shareholders. In contrast, a sell off constitutes complete remolding of the organizational structure and it includes an absolute disposal of some of its assets. However, retirement of succession planning is one of the major elements that influence a firm to adopt the techniques of divestitures. Rationalizing the number of shareholders is another motive behind divestiture strategies. Obviously, every shareholder of a firm would not be able to raise additional funds in times of contingencies. Moreover, every firm likes to retain potential shareholders because only they can contribute to the expansion of the company. The concept of divestiture enables the company to explore its potential shareholders. Colak and Whited (n.d.) claim that conglomerate invest efficiency play a vital role in determining the degree of growth of conglomerates. The authors add that a divestiture can effectively add to the improvement of conglomerate investment efficiency. Therefore, dismantling conglomerates becomes a strong motive behind a divestiture. Similarly, a firm may have earned number of business entities by the way of acquisitions. It is often seen that the acquisition strategies adopted by firms become incorrect and thereby such firms are compelled to discard their acquisitions. Under such
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Do Divestiture have Positive Wealth Effects? Literature Review (College/University) Do Divestiture have Positive Wealth Effects? Literature Review Introduction In economics, divestiture or divestment represents partial or full disposal of an investment or asset by way of sale, closure, exchange, or bankruptcy…
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