Shackles of the Past: Why firms divest too late and when they can free themselves from the shackles of organizational inertia

Abstract

While divestiture was often regarded as a simple mirror image of M&A or even a symbol of failure in the past, more people are now recognizing it as a badge of smart, market-oriented management. Its role as an independent, purposeful strategic option to make a breakthrough or achieve sustainable growth is further magnified in the current era of low-growth. Yet, many firms are still reluctant to divest. Consequently, most divestitures are done in response to some kind of pressure, majority of which take place after a firm has suffered from weak performance for many years. To date, the majority of strategic management research on divestitures has given its main focus largely on the triggers of divestitures. Research regarding the response speed of vendor remains relatively unexplored and calls for a close investigation. To identify specific factors that lead to reactive divestitures, this study integrated research on organizational inertia and corporate governance, and hypothesized that vendor responsiveness is contingent on organizational tenure of a CEO, a vendors prior divestiture experience, relative size of the unit to the total size of the vendor, and board independence. This study incorporated the concept of financial distress of finance research to operationalize the vendor responsiveness. The results indicate that long organizational tenure, low divestiture experience, and a large chunk of divested unit delay divestitures, and that the accumulation of divestiture experience and independent board are important to overcome the inertia caused by long organizational tenure. The effects of CEO tenure in the position vis-à-vis CEO organizational tenure on vendor responsiveness as well as outside director ownership as a superior proxy to board demography for effective independent board are discussed.