Past research generally suggests that divestitures are aimed at reducing excessive firm diversification. This view, however, overlooks the fact that not all divestitures result in refocusing. Indeed, many divestitures are motivated by the existence of over-capacity within the firm. In addition, while prior research has generally found that divestitures improve performance by reducing excessive diversification, more recent research has argued and shown that during an economic downturn, more diversified firms tend to outperform their focused counterparts. Changing economic conditions thus appear as a suitable context in which to study the mechanisms through which divestitures can create value. This paper examines how, under different environmental conditions, firms are more prone to undertake either downscoping (divestitures leading to a reduction in business scope) or downscaling (divestitures that only reduce firm size without affecting business scope) divestitures, as well as the performance impact of either type of divestiture. We find that firms are less likely to undertake downscoping divestitures during an economic downturn whereas they are more likely to undertake downscaling divestitures. Furthermore, we show that firm ownership and asset fungibility moderates the relationship between economic downturn and divestitures. This paper provides a boundary condition to the argument that firms primarily divest to reduce diversification and highlights the role played by downscaling divestitures in a firm’s corporate strategy.