Foreign and Domestic Divestments: Evidence on Valuation Effects of Plant Closings

Abstract

This study examines the valuation consequences of domestic and foreign divestments by comparing the stock price reaction to announcements of domestic plant closings and foreign plant closings. A domestic plant closing could indicate firm-wide problems and impending firm deterioration. A foreign plant may serve to exploit arbitrage opportunities specific to that plant location. Closing a foreign plant need not signify firm-wide problems. Our comparison of stated reasons for closings supports these propositions. Therefore, foreign plant closing announcements should produce a smaller stock price decline that domestic plant closing announcements. Empirical results indicate a significant negative stock price reaction for domestic plant closings and an insignificant negative stock price reaction for foreign plant closings. Differences in stock price reaction remain after controlling for firm-specific factors.