Management Papers

Document Type

Journal Article

Date of this Version

5-2014

Publication Source

Organization Science

Volume

25

Issue

3

Start Page

815

Last Page

832

DOI

10.1287/orsc.2013.0873

Abstract

This paper investigates “legacy divestitures,” the sale or spinoff of a company’s original, or “legacy,” business. The central tension considered in this work is that the historical presence of a firm’s legacy business should simultaneously make that unit very interdependent with the company’s remaining operations and make the firm’s managers highly likely to take those same interdependencies for granted. Consistent with these predictions, the post-divestiture operating performance of firms that divest their legacy businesses falls short of that of firms that retain comparable legacy units, especially when the divested unit operates in the same industry as others of the divesting firm’s businesses. Newer chief executive officers (CEOs) are more likely to undertake legacy divestitures than their longer-tenured peers, and the most recently appointed CEOs undertake the most costly legacy divestitures. In summary, this paper provides insights into how historical interdependencies create value in diversified firms, as well as the decision-making processes that managers follow in overseeing these companies.

Keywords

legacy divestitures, diversification, interdependencies, tacit knowledge, corporate strategy

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Date Posted: 27 November 2017

This document has been peer reviewed.