Philip G. Berger, Eli Ofek
ABSTRACT
We study the precursors and outcomes of refocusing episodes by diversified
firms that were not taken over. Those that refocus have more value-reducing
diversification policies than those not refocusing. Major disciplinary
or incentive-altering events (including management turnover, outside shareholder
pressure, changes in management compensation, and financial distress) usually
must occur, however, before managers refocus. Consistent with divestitures
reversing, at least in part, value destruction from unsuccessful diversification
strategies, the cumulative abnormal returns over a firm's refocusing-related
announcements average 7.3%, and are significantly related to the amount
of value-reduction associated with the refocuser's diversification policy.
Berger: (215) 898-7125 berger@wharton.upenn.edu
Ofek: (212) 998-0356 eofek@stern.nyu.edu
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