Security price reaction to divestments by healthy and financially distressed firms: the case of MBOs

This paper examines the response of security prices to management buy out (MBOs) divestments and the difference in abnormal returns to shareholders of financially distressed and healthy divestors. It is hypothesized that healthy firms divesting businesses will experience a higher abnormal return than those divesting for reasons of financial distress. Excess returns are significantly both negative and higher for financially distressed firms than for healthy firms. The results suggest that, in examining the effect of corporate restructuring announcements on shareholders wealth, a distinction needs to be made between voluntary and involuntary divestments.