The Hidden Costs of Divestitures – Implications for the Commitment of the Remaining Employees

Abstract

This study investigates the consequences of corporate divestitures from the largely neglected perspective of the divesting firm's remaining employees. Drawing on social exchange and psychological contract theory, we argue that divestitures – despite not involving direct job losses – can be perceived by the remaining employees as breaches of implicit employer obligations. We develop and test a theoretical framework that explains when and why the remaining employees perceive divestitures as breaches of psychological contracts, thereby weakening their organizational commitment. Specifically, we theorize that perceptions of psychological contract breaches are shaped by the organizational proximity between the divested unit and the remaining employees (i.e., divestiture proximity), with the financial performance of the divested unit and the remaining employees' reciprocity norms moderating this relationship. Using 1.8 million employee‐year‐level observations, we find a positive association between divestiture proximity and turnover as a behavioural outcome of reduced commitment, which is even stronger when the divested unit performed poorly and employees place greater value on reciprocity. Our findings contribute to a more nuanced understanding of divestitures by redirecting attention toward the employee–firm relationship and advancing theory on how individuals adjust their commitments after organizational restructuring.