Pure-Play Creation: Will Increased Focus on Core Business Lines Unleash Shareholder Value?

Abstract: Industrially and globally diversified firms are valued at a discount to a portfolio of pure-play comparable businesses. Hence any firm with non-core activities should be able to unleash shareholder value through elimination of the diversification discount by streamlining the firm through divestments/spin-offs/equity carve-outs. Using event study methodology all transactions during the period 1995-2006 undertaken by Swedish listed firms are examined. The central contribution of this paper is that the transactions are linked to positive abnormal returns of 1.0-1.5% (statistically significant at the 1% level) on the days surrounding the announcement. Further, several explanations for why the total effect might in fact be much larger than the observed figures indicate are identified. The findings are in line with previous international studies and prevailing finance theory.