Practice makes progress: evidence from divestitures

This paper examines the role of firm-level experience in the context of divestitures. We find that divesting firms that have recent divestiture experience (hereafter, experienced divestors) are more likely to sell peripheral or underperforming units, and to divest during industry merger waves. Experienced divestors earn higher returns on divestiture announcement, have stronger operating performance post-divestiture, and tend to reinvest sale proceeds in expansion programs using acquisitions. Importantly, we show that divestiture experience at the firm level dominates other measures of experience, including divestiture experience of CEOs or boards, and experience in acquisitions. We take steps to mitigate concerns about econometric and sampling issues. These findings suggest that a strategy of restructuring through divestitures can improve firm value.