Financing Asset Sales and Business Cycles

50 Pages Posted: 19 Nov 2013 Last revised: 24 Jul 2017

See all articles by Marc Arnold

Marc Arnold

University of St. Gallen - School of Finance; Swiss Finance Institute

Dirk Hackbarth

Boston University - Questrom School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Tatjana Xenia Puhan

University of Mannheim - Department of International Finance

Date Written: July 18, 2017

Abstract

Using a dynamic model of financing, investment, and macroeconomic risk, we investigate when firms sell assets to fund investments (financing asset sales) across the business cycle. Equity financed investment transfers wealth from equity to debt because asset volatility declines and earnings increase when firms invest. Financing asset sales reduce asset collateral and, hence, transfer wealth back from debt to equity. Exploring the dynamics of the heretofore overlooked “asset sale versus external equity” financing margin across business cycles helps explain novel stylized facts about asset sales and their business cycle patterns that cannot be rationalized by traditional motives for selling assets.

Online appendix is available at: https://ssrn.com/abstract=3003964

Keywords: Asset Sales, Wealth Transfer Problem, Leverage, Business Cycles, Real Options

JEL Classification: D92, E32, E44, G12, G32, G33

Suggested Citation

Arnold, Marc and Hackbarth, Dirk and Puhan, Tatjana Xenia, Financing Asset Sales and Business Cycles (July 18, 2017). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2356377 or http://dx.doi.org/10.2139/ssrn.2356377

Marc Arnold (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Dirk Hackbarth

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tatjana Xenia Puhan

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

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