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Corporate diversification, refocusing and shareholder voting

Journal: International Review of Financial Analysis

Date: 2021

Author: Yerzhan Tokbolat, Hang Le, Steve Thompson

Abstract:
We examine if shareholders' attitude towards firm diversification strategy is revealed in their votes on management-initiated acquisition and divestment proposals using data on voting by shareholders of UK public firms between 1997 and 2019. We find that voting dissent is higher for diversifying acquisitions and lower for refocusing divestments, especially when these involve diversified firms. We also find a negative relationship between diversification premium and voting dissent. Our results provide evidence that diversification characteristics of firms and deals have a significant impact on shareholders' dissent in acquisitions and divestments.

Link: Google Scholar

Background and Context

Research Focus

This study examines how shareholders' attitudes towards corporate diversification strategy are revealed through their voting patterns on acquisitions and divestments using UK data from 1997-2019.

Regulatory Environment

UK regulations require shareholder approval for major acquisitions and divestments that account for at least 25% of company size, providing a unique setting to study shareholder voting behavior.

Methodology

The research analyzes 380 acquisitions and 279 divestments using probit regression models to examine the relationship between voting dissent and diversification characteristics at both firm and deal levels.

Higher Dissent for Diversifying Acquisitions vs Non-Diversifying Acquisitions

  • Shareholders show significantly higher dissent for diversifying acquisitions compared to non-diversifying ones
  • The pattern holds across all SIC code classification levels (4-digit, 3-digit, and 2-digit)
  • Dissent levels for diversifying deals are roughly 3 times higher than for non-diversifying deals

Lower Dissent for Refocusing Divestments vs Non-Refocusing Divestments

  • Shareholders show lower dissent for refocusing divestments compared to non-refocusing ones
  • The pattern is consistent across all SIC code classification levels
  • The difference suggests shareholders support strategies that reduce diversification

Impact of Firm Diversification Level on Voting Dissent

  • Diversified firms face higher dissent on acquisitions but lower dissent on divestments
  • The contrast suggests shareholders prefer diversified firms to refocus rather than expand further
  • This finding supports the agency theory explanation of diversification

Relationship Between Diversification Premium and Voting Dissent

  • Diversified firms trade at a significant discount compared to focused firms
  • The diversification discount averages -0.33 for diversified firms
  • Higher discounts are associated with increased shareholder dissent

Deal Characteristics and Voting Dissent

  • Cash deals are more common in divestments (66%) than acquisitions (40%)
  • Foreign deals are more prevalent in acquisitions (52%) than divestments (39%)
  • These characteristics influence shareholder voting patterns

Contribution and Implications

  • First study to examine shareholder voting behavior in the context of corporate diversification and refocusing strategies
  • Provides evidence that shareholders actively use their voting rights to influence firm diversification decisions
  • Findings support regulatory reforms aimed at increasing shareholder engagement in corporate decision-making

Data Sources

  • Charts 1 & 2: Based on Table 2 - Univariate analysis of voting dissent for diversifying vs non-diversifying deals
  • Chart 3: Based on Table 1 - Descriptive statistics comparing focused and diversified firms
  • Chart 4: Based on Table 1 - Diversification premium data
  • Chart 5: Based on Table 1 - Deal characteristics data