Corporate Asset Purchases, Sales and Governance

Abstract:     
We identify asset purchases and sales as channels through which both external and internal governance affect corporate decisions and shareholders wealth. Firms with more antitakeover provisions (ATPs) are significantly more likely to engage in asset purchases (instead of making efficient internal investments) and asset sales (rather than efficient internal restructuring of existing assets). The internal governance mechanisms of insider ownership reduce the likelihood of asset purchases and sales consistent with incentive alignment. Additional results reveal that (1) the likelihood of asset buys is decreasing in insider ownership, but only among larger firms, and (2) the likelihood of asset sales is increasing in institutional ownership, but only among less profitable firms. The unexpected purchasers and sellers with more ATPs experience lower abnormal announcement returns. Also, the announcement effect of asset buys is concave (increasing at a decreasing rate) in insider ownership, and convex in institutional ownership. We also document that just as in the case of buyers and sellers with more ATPs, higher insider and institutional ownership lead to lower post-deal idiosyncratic risk (and lower shareholder wealth), suggesting higher agency costs of managerial conservatism and opacity.

Number of Pages in PDF File: 71

working papers series