Financing Through Asset Sales

55 Pages Posted: 19 Mar 2012 Last revised: 14 Jul 2017

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

William Mann

University of California, Los Angeles (UCLA) - Anderson School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 7, 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

Edmans, Alex and Mann, William, Financing Through Asset Sales (July 7, 2017). ECGI - Finance Working Paper No. 344/2013. Available at SSRN: https://ssrn.com/abstract=2024513 or http://dx.doi.org/10.2139/ssrn.2024513

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

William Mann

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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