Doctoral Dissertations

Date of Award

8-1986

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Business Administration

Major Professor

George C. Philippatos

Committee Members

Dosoung Choi, Ronald Shrieves, John Philpot

Abstract

This study utilizes the life-cycle concept to examine the voluntary divestiture phenomenon and is successful in separating a sample of 145 divesting firms into four life-cycle groups through the use of cluster analysis preceded by factor analysis. The resulting groups, late expansion/early maturity, regenerating maturity, late maturity/early decline, and decline, differ from one another both in terms of basic financial characteristics just before the divestiture event and in terms of the changes in financial characteristics experienced around the divestiture event by these divesting firms relative to their matched control firms. Support is found for most of the divestiture hypotheses suggested by life-cycle theory using paired-sample nonparametric tests and t-tests.

The late expansion/early maturity group obtained some improvement in debt levels as is consistent with the life-cycle hypothesis for these firms. The life-cycle hypothesis for this group of liquidity improvement is not supported. The results for the late maturity/early decline group show stronger improvements in profit ability than for any of the other groups as life-cycle theory would predict. This group was also successful in postponing decline relative to the matched control group. The decline group had a strong improvement in liquidity and some improvement in dividend paying ability, also consistent with life-cycle theory. The regenerating maturity group experienced improved profitability and some increases in liquidity.

Results obtained from the residual return analysis using the Mean Adjusted Return Model are somewhat mixed with the late maturity/ early decline group tests yielding the strongest positive results. No conflict between the motives suggested by the life-cycle concept and stock price maximization is observed.

The life-cycle concept is shown to be useful in providing focus for identifying different probable motives for divestiture out of a wide range of possibilities depending on the life-cycle stage of the divesting firms. Suggestions for future research include the application of the life-cycle framework to the analysis of other firm events such as merger and stock issuance.

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