Impact Of Covid-19 Pandemic On Shareholder Wealth Creation Via Divestitures: A Study Of Industries Highly Impacted.

Abstract

The pandemic was a very stressful time for the financial performance of any firm. The paradigm in which companies operated changed drastically. Services companies in industries of education, tourism, wholesale and retailing, IT, and transport had to change the way they function as their physical customer contact points were lost. They needed new means to connect and deliver services to the customers. One can expect the devastation it had on the financial performance of companies in these particular industries. There were 41 divestitures in IT, wholesale and retail, education, tourism, and transport industries taken together in India. Conventional literature on divestitures states that divestitures lead to positive shareholder wealth creation. All this begs the question - was there positive shareholder wealth creation in these fifty transactions of divestitures of these five industries that were dramatically hit by the pandemic? Did conventional divestiture results also hold in the case of the pandemic for the companies in these five industries? This paper analyses the shareholder wealth created by the divesting companies of these highly influenced industries by the pandemic. This study uses standard market-based event study methodology with an event window of twenty-one days, six days, and three days to investigate the reaction of the stock market to these divestiture announcements and an estimation period of two hundred and forty days to calculate the normal return. The study finds a significant positive 1.26% Cumulative Average Abnormal Return (CAAR) in an event window of ten days before and ten days after the divestiture announcement. Yet the immediate CAAR of the divestiture one day before and one day after the divestiture announcement was statistically significant  -0.059%. Whereas the CAAR in the event window of three days before and after the divestiture was 1.43%. This study has great application for investors to devise a strategy around divestiture announcements, which has been shown to have a positive impact on shareholder wealth even in dire conditions of the pandemic.