48 Pages Posted: 19 Mar 2012 Last revised: 31 Jan 2017
Date Written: January 30, 2017
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: Suggested Citation
Edmans, Alex and Mann, William, Financing Through Asset Sales (January 30, 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
By Alex Edmans