Financing Need and the Choice Between Asset Sale and Security Issuance
69 Pages Posted: 23 Nov 2016 Last revised: 16 Apr 2018
Date Written: March 27, 2018
We study the effect of financing need on a firm’s choice between issuing securities and selling assets to finance its investments. The balance sheet effect predicts that a firm prefers to sell assets when the financing need is small as there is less information asymmetry regarding the value of a subset of its assets than that regarding the value of securities, which represent claims on its entire balance sheet. With the increase in financing need, the security issuance over an asset sale becomes preferable. We find evidence supporting this prediction. Our results are robust to the use of outcome independent measures of financing need.
Keywords: Financing choice; Asset sales; Security issuance; Debt issuance; Seasoned equity offerings.
JEL Classification: G32; G34
Suggested Citation: Suggested Citation