Financing Through Asset Sales
London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
UCLA Anderson School
June 20, 2016
ECGI - Finance Working Paper No. 344/2013
Most research on firm financing studies debt versus equity issuance. We model an alternative source, non-core asset sales, and contrast it with equity. First, unlike asset purchasers, equity investors own a claim to the firm's balance sheet (the "balance sheet effect"). This includes the cash raised, mitigating information asymmetry. Contrary to the intuition of Myers and Majluf (1984), even if non-core assets exhibit less information asymmetry, the firm issues equity if the financing need is high. Second, firms can disguise the sale of low-quality assets -- but not equity -- as motivated by dissynergies (the "camouflage effect"). Third, selling equity implies a "lemons" discount for not only the equity issued but also the rest of the firm, since both are perfectly correlated (the "correlation effect"). A discount on assets need not reduce the stock price, since non-core assets are not a carbon copy of the firm.
Number of Pages in PDF File: 54
Keywords: Asset sales, financing, pecking order, synergies
JEL Classification: G32, G34
Date posted: March 19, 2012 ; Last revised: June 22, 2016
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