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Divestiture from China by Taiwanese Listed Electronic Information Firms: Effects of Host Country
Performance and Selection Bias

Divestiture from China by Taiwanese Listed Electronic
Information Firms: Effects of Host Country Performance and
Selection Bias

Jen-Jen Tseng, Department of Finance, Chien Hsin University of Science and Technology
Yung-Cheng Lai, Department of International Business, Chien Hsin University of Science and
Technology
Tzu-Chuan Kao, Department of Financial Management, Kun-Shan University

1. Purpose and Objective

In the context of globalization, firms frequently enter and exit markets. Studies have

often investigated the financial performance of firms in a host country to explain firms’
divestiture decisions, reporting that poor performance of overseas subsidiaries or divisions
results in a parent company losing its ability to sustain further losses and, consequently,
divesting from the host country. However, decision-makers sometimes engage in

commitment escalation, where they fail to acknowledge investment failures and decide
instead to increase their investments, even when a host country’s financial performance
is poor. Furthermore, firms may abandon profitable business units to avoid uncertainty,
which can lead to a lack of convergence between the host country financial performance

and divestiture decisions.
The present study employs firm behavior theory and prospect theory to examine the
effect of investing in China on decisions to divest from China. Specifically, this study aims
to clarify the association between investment performance in China and the likelihood

of divestment when firms are profitable as well as that between investment performance
in China and the likelihood of divestment when firms are incurring losses. Furthermore,
the present study also explores the association between firms’ divestment and market
performance and particularly that between erroneous divestiture decisions and market

performance.

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