Does familiarity with business segments affect CEOs' divestment decisions?

- This paper examines the impact of CEOs' familiarity on divestiture decisions.
- CEOs are less likely to divest assets from familiar segments.
- CEOs can only divest unfamiliar segments after gaining sufficient political power.
- CEOs favor familiar segments, because they are better informed about these segments.

We examine the impact of familiarity with business segments on CEOs' divestment decisions. We find CEOs are less likely to divest assets from familiar than from non-familiar segments. We attribute this effect to CEOs' comparative information advantage with respect to familiar segments. Consistent with this information advantage, we document that the familiarity effect is particularly strong in R&D intensive industries. We further find the familiarity effect to be most pronounced for longer-tenured CEOs who have built up sufficient political power over the course of several years in office to enable implementation of their preferred divestment choices. We also document the value effects of divestments and show that familiarity affects returns on divestment announcements.