The Dark Side of Divestiture:
An Analysis of Principal-Principal Conflicts in Western European Countries
Enzo Peruffo*
Department of Business and Management LUISS Guido Carli
Viale Romania, 32 00198 Roma E-mail: eperuffo@luiss.it Office: +39 06 85 225 435
Raffaele Oriani
Department of Business and Management LUISS Guido Carli
Viale Romania, 32 00198 Roma E-mail: roriani@luiss.it Office: +39 06 85 225 908
Timothy B Folta University of Connecticut
University of Strasbourg Institute for Advanced Study, BETA E-mail: tfolta@business.uconn.edu
Office: (860) 486-3734
* Corresponding Author
We thank Laurence Capron and Maria Goranova for their careful and critical reading of earlier versions of the paper.
Abstract
This paper examines how shares held by dominant owner affect abnormal returns around divestitures in the Western European Countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Norway, Portugal, Spain, Sweden, Switzerland, and the U.K.). We hypothesize that in institutional contexts where minority shareholder protection is weaker, divestitures are more likely to be attempts by dominant owners to expropriate rents from minority shareholders. The emphasis on the agency relationship between dominant and minority shareholders complements a growing stream of literature recognizing that closely-held firms dominate the landscape in many countries. A unique dataset of 265 divestitures across thirteen countries is used to test the hypotheses. The evidence suggests that the effects of shares held by dominant owner differs markedly across institutional contexts with different minority shareholder rights protection.
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