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Divestitures: wealth transfers or real economic gains?

We investigate whether divestitures are associated with changes in operating performance. We evaluate the total operating performance of a pro-forma combination of seller and buyer firm in each divestiture and of the seller and buyer firms separately. We control for industry performance, pre-sale performance of the seller and buyer firms and the level of persistence in their operating performances. The total operating performance of the pro-forma combination increases by 3.2% per annum and the operating performance of the seller (buyer) firms increases by 3.0% (3.1%) per annum, on average, for 3 years after the sell offs. We conclude that divestitures lead to real economic gains and not merely a zero-sum transfer.