Bank Debt, Flexibility, and the Use of Proceeds from Asset Sales

37 Pages Posted: 26 May 2011 Last revised: 16 Mar 2012

See all articles by Hoontaek Seo

Hoontaek Seo

Niagara University

C. Edward Fee

Tulane University - A.B. Freeman School of Business

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce

Shan Yan

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: May 20, 2011

Abstract

In the theory of financial intermediation, bank debt is often characterized as being more readily renegotiable than public debt. Banks are also conjectured to gain valuable non-public information through closer monitoring. Given these features, bank debt can theoretically be more flexible than public debt and can lead to better investment/liquidation decisions. We investigate this possibility using a sample of firms facing the important decision of whether to reinvest the proceeds from asset sales or whether to distribute the proceeds to debt or equity investors. While higher levels of leverage are associated with an increased probability of distributing proceeds to creditors, this relationship is significantly muted for bank debt as opposed to public debt. This finding is consistent with the conjecture that bank debt provides enhanced flexibility when compared to public debt. Further we find that announcement period abnormal stock returns are increasing in firms’ use of bank debt, but not public debt. This suggests that market participants believe that banking relationships are leading to better decision making for this particular type of investment/liquidation decision. We find no significantly different effects of bank vs. public debt on the initial decision to undertake an asset sale in the first place. Thus, in the context of asset sales, the main observable difference arises in the use of proceeds decision, rather than the initial asset sale decision.

Keywords: Bank Debt, Financial Flexibility, Asset Sales

JEL Classification: G34

Suggested Citation

Seo, Hoontaek and Fee, C. Edward and Pierce, Joshua R. and Yan, Shan, Bank Debt, Flexibility, and the Use of Proceeds from Asset Sales (May 20, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1847843 or http://dx.doi.org/10.2139/ssrn.1847843

Hoontaek Seo (Contact Author)

Niagara University ( email )

Economics & Finance Department
College of Business Administration
Niagara University, NY 14109
United States
716-286-8146 (Phone)
716-286-8296 (Fax)

C. Edward Fee

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Joshua R. Pierce

University of Alabama Culverhouse College of Commerce ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Shan Yan

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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