Financing Through Asset Sales
Management Science, Forthcoming
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 344/2013
Jacobs Levy Equity Management Center for Quantitative Financial Research Paper
56 Pages Posted: 19 Mar 2012 Last revised: 11 Aug 2020
There are 3 versions of this paper
Financing Through Asset Sales
Financing Through Asset Sales
Financing Through Asset Sales
Date Written: October 9, 2017
Abstract
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 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.
Keywords: Asset sales, financing, pecking order, synergies
JEL Classification: G32, G34
Suggested Citation: Suggested Citation
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