Agency conflict and corporate strategy: the effect of divestment on corporate value¶
Peter Wright; Stephen P. Ferris (1997). Agency conflict and corporate strategy: the effect of divestment on corporate value. Strategic Management Journal, Vol. 18 (Research Notes and Communications). John Wiley & Sons.
| Type | journal article |
| Scope | Wider apartheid literature |
| Method | econometric |
| Period studied | 1984–1990 |
| Regions | United States, South Africa |
| Themes | sanctions divestment, business and state, methods data sources |
| Citation key | wright1997 |
Argument¶
The authors ask whether private and public political pressure, rather than value maximisation, drives corporate strategy. They use announcements by US-listed firms of divestment from South African operations as a test case. Applying an event study (CAPM-adjusted daily returns) to 31 divestment announcements by firms with good Sullivan ratings, they find a significant negative excess return on the announcement day. They read this as evidence that senior managers divested to relieve personal pressure, even at cost to shareholders, which they treat as an agency problem. They also surmise that such divestments did not help black South Africans, because firms with good Sullivan ratings offered good employment and acted as forces for reform.
Evidence and method¶
Investor Responsibility Research Center (IRRC) list of firms leaving South Africa (kept only from 1 January 1984). It identified 116 divestments in 1984-1990, narrowed to 31 public firms with good Sullivan ratings and identifiable announcement dates in the Wall Street Journal and New York Times indexes. Daily stock returns come from the CRSP database. Annual reports, Dow Jones News Retrieval and press indexes were checked to exclude divestments forced by shareholder resolutions or lawsuits.
Place in the debates¶
- Sanctions/divestment effectiveness and its costs (did corporate withdrawal help or harm black South Africans and shareholders) (see Sanctions, disinvestment and the anti-apartheid movement). Sceptical of divestment: argues it hurt shareholders and was probably not beneficial to black South Africans, and that continued US business engagement helped drive reform and the end of sanctions.
- Agency theory vs. value-maximising firm (do managers act in shareholders' interests) (see Sanctions, disinvestment and the anti-apartheid movement). Supports the agency view: negative announcement returns are read as managers responding to political pressure rather than to shareholder value.
Findings¶
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Divestment announcements are associated with negative abnormal stock returns (abstract result). (p. 1)
negative excess returns accrue to shares of companies announcing divestments of South African operations
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The sample is a small subset of the IRRC divestment list, which only begins in 1984. (p. 4)
For the period January 1, 1984 through December 31, 1990, a total of 116 divestments are
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Only firms with good Sullivan ratings were studied, to control for social-responsibility motives. (p. 4)
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| Sullivan ratings / Sullivan principles (as used by Lashgari and Gant 1989) | secondary literature compilation | 1977–1990 | Used as a sample selection criterion (only firms with good Sullivan ratings) and as a proxy for social responsibility. |
| Press reports on South African reform and U.S. sanctions (USA Today, 4 January 1994; Wall Street Journal 1994) | newspapers periodicals | 1994 | Cited to support the narrative that pressure to divest built up and that U.S. business contributed to apartheid reform. |
New data¶
The authors constructed an event-study sample of 31 announcements of divestment of South African subsidiaries by U.S. publicly traded firms with good Sullivan ratings (1984–1990), filtered from 116 IRRC-listed divestments, and computed daily excess returns over a ±10-day window.
Inference¶
Quantification: Statistical analysis.
Event study (market model via CAPM, Brown and Warner/Fama et al. methodology) on 31 divestment announcements. Mean daily excess returns are cross-sectionally averaged and tested with t-statistics and a binomial sign test. The negative reaction is read as evidence of agency conflict, with the Sullivan-rating restriction serving as a control for social responsibility motives.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Pre- and post-announcement windows show no significant abnormal returns, so the effect is concentrated on the announcement day. (p. 82) | Table 2 daily and cumulative excess returns for days -10 to +10; only day 0 is significant at p<0.05. | Systematic data |
The author's caveats¶
The authors note that data availability limited the sample to 1984 onward because the IRRC list began then. They also note that noneconomic forces are not easily documented, and that some observers criticize event methodology and its presumption of market efficiency. The sample is reduced to 31 firms by excluding firms without event dates or that were not publicly traded.
Gaps in the evidence¶
The study cannot observe managerial motives, so agency conflict is inferred from the sign of the stock reaction alone. Confounding information, such as the profitability of the South African units, firm size, ownership structure and managerial incentives, is not examined. The sample of 31 firms is small and restricted to good-Sullivan-rating firms, with no comparison to other firms or to non-announcers. Firm-level accounts of the South African subsidiaries' profitability, and contemporaneous news from the announcement windows, existed then and could test the argument better. The claim about benefits to black South Africans has no employment or wage data behind it.
Replicability: Data described but not public.