Access Type

Open Access Dissertation

Date of Award

January 2015

Degree Type

Dissertation

Degree Name

Ph.D.

Department

Management and Information Systems

First Advisor

Ranjan D'Mello

Abstract

This dissertation is the first to study the product effect of horizontal divestitures on upstream and downstream firms. This first essay examines product market impact of a sample of horizontal asset sales from 1988 to 2005 on corporate customers, suppliers, and industry rivals. I create a sample of firms that classifies corporate customers, suppliers, and industry competitors of firms proposing horizontal asset sales, and employ this data set to investigate the wealth effects at announcement. This study also considers post-divestiture changes in abnormal operating performance for divesting firms, customers, and suppliers.

I document evidence that divestiture related wealth effects for divesting parent firms are associated with efficiencies resulting from the reduction of firm bureaucracy I provide evidence that managers must balance post-divestiture productivity gains with potential declines in profitability due to reduced bargaining power with suppliers. Unlike prior evidence from vertical divestitures (Jain, Kini, and Shenoy, 2011), this study documents that parent firm divestiture gains are not shared by their industry rivals, corporate customers and suppliers. I also find that these events have negative implications for the valuation of industry rivals, corporate customers, and certain subsamples of suppliers. In addition, the evidence suggests that factors such as customer (supplier) switching costs and industry structure tend to play an important role in the wealth effects of customers (suppliers) at announcement of upstream (downstream) divestitures.

The second essay of my dissertation investigates this topic by exploring quarterly horizontal divestiture activity at the industry level by aggregating firm level divestitures by industry using a sample of horizontal divestitures from 1979-2010. This essay documents the opportunistic behavior of certain product market participants, such as customers and suppliers, in the context of horizontal divestitures. I perform an extensive empirical cross-industry investigation of the product market effects of horizontal divestitures on supplier (customer) industries via their impact on profitability, value, and prices (profitability, value, and input costs).

The second essay presents evidence that opportunistic customers exploit supplier dependence in the years following significant upstream divestiture activity. As a result, these customers enjoy significant increases in profitability, value, and a considerable decline in input costs relative to customers of non-dependent suppliers. Additionally, I also find that suppliers with pivotal buyers suffer unfavorable changes in profitability and value in the years subsequent to downstream divestiture activity relative to suppliers with non-pivotal buyers. This evidence suggests that pivotal buyers capitalize on significant downstream divestiture activity to reverse their pivotal position and eliminate cross-subsidization by suppliers and non-pivotal buyers within their industry.

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