The roles of closure and selloff in corporate restructuring

This paper compares the roles of closure and selloff in corporate restructuring, by examining 749 Japanese firms engaged in these two types of divestment activities in the 1990s and 1146 subsidiaries divested by these firms. For closure, we find that (1) divesting firms tend to be less profitable than non-divesting firm, (2) divested subsidiaries have characteristics suggestive of inefficiencies, and (3) divesting firms' profitability improved after the closure, albeit slowly. The results suggest that firms employ closure mainly to discontinue inefficient operations. For selloff, in contrast, we find that (4) divesting firms are no less profitable than non-divesting firms, (5) divesting firms' profitability did not change but their investment intensity increased substantially around the divestiture, and (6) divested subsidiaries had characteristics of high salability and separability. The results suggest that selloff is used to raise funds for the remaining parts of divesting firm. Overall, our results suggest that closure and selloff play heterogeneous roles in the restructuring of Japanese firms.