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Financing Through Asset Sales

Alex Edmans

London Business School - Institute of Finance and Accounting; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

William Mann

UCLA Anderson School

September 30, 2015

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 identify three new factors that 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 new financing raised, the amount of which is known, 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: 57

Keywords: Asset sales, financing, pecking order, synergies

JEL Classification: G32, G34

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Date posted: March 19, 2012 ; Last revised: October 1, 2015

Suggested Citation

Edmans, Alex and Mann, William, Financing Through Asset Sales (September 30, 2015). ECGI - Finance Working Paper No. 344/2013. Available at SSRN: http://ssrn.com/abstract=2024513 or http://dx.doi.org/10.2139/ssrn.2024513

Contact Information

Alex Edmans (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
William Mann
UCLA Anderson School ( email )
United States
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References:  45
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