Political Divestiture

Political Divestiture

DOI: 10.4018/978-1-5225-7619-8.ch006

Abstract

In the wake of historical and political events, stakeholder pressure can trigger divestment from politically incorrect markets. Six evaluation studies of political divestiture from South Africa during Apartheid were meta-analyzed to find a pattern of stakeholder pressure, political divestiture, and corporate endeavors. The meta-analysis covered the question of whether corporations divesting from politically incorrect markets are more likely to experiencing an increase, decrease, or no change in market value, and it found varying results – some studies suggest a positive effect, others a negative impact, and even no overall performance pattern of political divestiture and corporate value was reported. The study also detected a research gap on the impact of political divestiture on corporations operating in politically fractionate markets. Future research may compare values of divesting corporations with those operating in politically incorrect markets. The instringent results are attributed to stem from methodological limitations. Political divestiture is captured by the event study method which was evaluated for validity threats. Internal validity limitations of event study designs stem from confounding and contaminating history occurrences, sample selection biases, and inappropriate time frames. Insider trading information leakage but also industry specificities imply additional validity drawbacks. The external validity is challenged by geographically limited and time-targeted studies as well as non-typical samples that feature a lowered replicability and generalizability of the findings.
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Introduction

In the wake of historical and political events, socio-political pressure can evolve that triggers corporations to divest politically incorrect markets. The impact of socio-political events on financial considerations is attributed by political divestiture – the act of removing funds from politically fractionated markets.

Since the start of political divestiture in the 1970s, the connection of politics and investments has been subject to scientific scrutiny, yet comparative results are scarce. This deficiency was attributed in the following meta-analysis. Drawing from the field of SRI, the evaluation analyzed the body of research on political divestiture from South Africa during Apartheid (Puaschunder, 2015).

Most of the studies of political divestiture feature the event study methodology, which describes the effects of socio-political events on markets (Peterson, 1989). Event studies examine how the release of specific information impacts on stock prices and corporate values during a particular time (Harvey, 2008). The event ‘time window’ under scrutiny comprises the period immediately before, during and after the event of interest (Peterson, 1989). Until today there are hardly any examinations of the strengths and potential weaknesses of the event study methodology. In the following meta-analysis, attention will thus be paid to methodological aspects of the measurement of political divestiture (Puaschunder, 2017).

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