Financing Through Asset Sales
London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
UCLA Anderson School
June 27, 2014
ECGI - Finance Working Paper No. 344/2013
Most research on firm financing studies the choice between debt and equity. We model an alternative source -- non-core asset sales -- and identify three new factors that drive a firm's choice between selling assets and equity. First, equity investors own a claim to the cash raised. Since cash is certain, this mitigates the information asymmetry of equity (the "certainty effect"). In contrast to Myers and Majluf (1984), even if non-core assets exhibit less information asymmetry, the firm issues equity if the financing need is high. This result is robust to using the cash for an uncertain investment. Second, firms can disguise the sale of a low-quality asset as instead motivated by operational reasons -- dissynergies -- and thus receive a higher price (the "camouflage effect"). Third, selling equity implies a "lemons" discount for not only the equity issued but also the rest of the firm, since its value is perfectly correlated. In contrast, a "lemons" discount on assets need not lead to a low stock price, as the asset is not a carbon copy of the firm (the "correlation effect").
Number of Pages in PDF File: 39
Keywords: Asset sales, financing, pecking order, synergies
JEL Classification: G32, G34
Date posted: March 19, 2012 ; Last revised: June 30, 2014
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