Divestiture Dilemmas: The Impact of CEO Organizational Identification on Corporate Divestiture Propensity, Size, and Scope

Abstract: While previous research has shown that characteristics of CEOs can impact their reluctance towards engaging in divestiture activity, less is known about how CEO organizational identification (OI) influences their divestiture decisions. This study examines how CEO OI impacts a company's propensity to divest business units, the size of divestitures, and the scope of post-divestiture refocusing. Based on previous OI literature, we measure OI by creating a composite variable using four CEO characteristics: tenure, whether the CEO is the founder of the firm, equity ownership stake, and whether the CEO was internally promoted. Using a sample of CEOs and divestitures during the years 1997-2022 from S&P 1500 companies, we find a negative relationship between CEO OI and the likelihood of divestiture. Furthermore, our findings show that CEO OI is negatively associated with the size of divestitures. However, we find no evidence of a relationship between CEO OI and the divestiture scope. Our findings contribute to the divestiture literature by underscoring the importance of CEO OI as an explanation of why CEOs become reluctant towards engaging in divestiture activity. Furthermore, contrary to previous literature on the relationship between OI and corporate finance decisions, our findings suggest that higher levels of CEO OI may not always be associated with reduced agency costs.