The impact of formal and informal institutions on stock market reactions to divestment announcements: A meta-analysis

Abstract

This study examines how institutional factors and cultural characteristics influence stock market reactions to divestment announcements. Drawing upon agency and institutional theories, we posit that divestment announcements in countries with stronger shareholder protection generate higher positive returns than divestments in countries with weaker shareholder protection. Furthermore, we contend that stock market reactions to divestment announcements tend to be negative in countries with a long-term orientation culture or high levels of corruption. To test these hypotheses, we conduct a meta-analysis of 144 primary studies with 202 effect sizes and 90,449 firm-level observations. The results indicate that, in general, divestments result in a strong positive stock market reaction. Furthermore, our findings suggest a positive moderation effect of a stable regulatory environment on the relationship between stock market reactions to divestments. While stock market reactions to divestments are negative in countries with a long-term cultural orientation, they tend to be positive in presence of external corruption.