Sell-Offs, Internal Capital Markets, and Long Run Performance : Canadian Evidence

This study investigates the relationship between the level of the excess returns subsequent to sell-offs and changes in the capital allocated through internal capital markets. We measure excess returns by calculating buy-and-hold abnormal (BHAR) returns up to three years after divestitures and test whether changes in value are related to changes in investment efficiency. We use the relative value added by allocation (RVA) as developed by Rajan et al. (2000) to measure the variation in allocational efficiency of the internal capital market.Our study reveals that on average assets divestitures enable Canadian firms to keep up with the performance of their peers of the same industrial sector during the long-run post divestiture period. A closer look at the results shows that the variation of long-run post divestitures performance among Canadian firms is significantly and positively linked to changes in the allocational efficiency of the internal capital markets. These results suggest that dismantling some parts of the internal capital market does lead to improvements in firm value in the long run