Financing Asset Sales and Business Cycles
50 Pages Posted: 19 Nov 2013 Last revised: 24 Jul 2017
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: Suggested Citation
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