Title

Managerial Expertise, Corporate Decisions, and Firm Value: Evidence from Corporate Refocusing

Publication Type

Journal Article

Publication Date

7-2014

Abstract

This paper investigates how managerial expertise—specifically, industry expertise—affects firm value through divestiture. Using CEOs’ managerial experiences in industries throughout their careers as a measure of their industry expertise, I find that CEOs in diversified conglomerates are more likely to divest divisions in industries in which they have less experience. This finding is consistent with CEOs who divest such divisions in order to refocus on those divisions in which they have specialized—that is, to achieve a better match between their expertise and their firms’ retained assets. Firms that divest for a better CEO-firm match experience significant improvements in operating performance, as well as significant abnormal stock returns that persist for an average of three years following a divestiture. Further, among firms that divest for a better match, those firms with more experienced CEOs realize greater gains in firm value. In contrast, divestitures that increase corporate focus, but do not improve the expertise-asset match, do not lead to long-run increases in firm value.

Keywords

CEO characteristics, Managerial expertise, Refocus, Diversification, Divestiture

Discipline

Finance and Financial Management

Research Areas

Finance

Publication

Journal of Financial Intermediation

Volume

23

Issue

3

First Page

348

Last Page

375

ISSN

1042-9573

Identifier

10.1016/j.jfi.2014.04.003

Publisher

Elsevier

Additional URL

http://dx.doi.org/10.1016/j.jfi.2014.04.003