Financing Through Asset Sales

43 Pages Posted: 5 Jan 2013

See all articles by Alex Edmans

Alex Edmans

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

William Mann

Emory University - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: January 2013

Abstract

Most research on firm financing studies the choice between debt and equity. We model an alternative source - non-core asset sales - and allow asset sales to occur for operational as well as financing motives. We identify three new factors that drive a firm's choice between selling assets and equity. First, equity investors own a claim to the cash raised. Since cash is certain, this mitigates the information asymmetry of equity (the "certainty effect"). In contrast to Myers and Majluf (1984), even if assets exhibit less information asymmetry, the firm issues equity if the financing need is high. This result is robust to using the cash for an uncertain investment. Second, firms can disguise the sale of a low-quality asset as instead being motivated by operational reasons (dissynergies), and thus receive a high price (the "camouflage effect"). Third, selling equity implies a "lemons" discount for not only the equity issued but also the rest of the firm, since its value is perfectly correlated. In contrast, a "lemons" discount on assets need not lead to a low stock price, as the asset is not a carbon copy of the firm (the "correlation effect").

Suggested Citation

Edmans, Alex and Mann, William, Financing Through Asset Sales (January 2013). NBER Working Paper No. w18677, Available at SSRN: https://ssrn.com/abstract=2196740

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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

William Mann

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

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