Financing Through Asset Sales
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)
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
Date posted: March 19, 2012 ; Last revised: October 1, 2015
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