Equity and Cash in Intercorporate Asset Sales: Theory and Evidence

47 Pages Posted: 7 Mar 2007

See all articles by Ulrich Hege

Ulrich Hege

Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Stefano Lovo

HEC Paris - Finance Department

Myron B. Slovin

Louisiana State University, Baton Rouge - Department of Finance; HEC Paris

Marie E. Sushka

Arizona State University

Date Written: November 2006

Abstract

We develop a two-sided asymmetric information model of asset sales that incorporates the key differences from mergers and allows the information held by each party to be impounded in the transaction. Buyer information is conveyed through a first-stage competitive auction. A seller with unfavorable information about the asset accepts the cash offer of the highest bidder. A seller with favorable information proposes a take-it-or-leave-it counteroffer that entails buyer equity. Thus, the cash-equity decision reflects seller, but not buyer, information in contrast to the theoretical and empirical findings for mergers. The central prediction of our model is that there are large gains in wealth for both buyers and sellers in equity-based asset sales, whereas cash sales generate significantly smaller gains that typically accrue only to sellers. Our empirical results are consistent with the predictions of our theoretical model.

Keywords: Asset sales, means of payment, auctions, two-sided asymmetric information

JEL Classification: D44, G34

Suggested Citation

Hege, Ulrich and Lovo, Stefano and Slovin, Myron B. and Sushka, Marie E., Equity and Cash in Intercorporate Asset Sales: Theory and Evidence (November 2006). Available at SSRN: https://ssrn.com/abstract=967540 or http://dx.doi.org/10.2139/ssrn.967540

Ulrich Hege (Contact Author)

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France
+33 5 61 12 86 01 (Phone)

HOME PAGE: http://https://www.tse-fr.eu/people/ulrich-hege

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Stefano Lovo

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Myron B. Slovin

Louisiana State University, Baton Rouge - Department of Finance ( email )

2163 CEBA
Baton Rouge, LA 70803
United States
480-820-5949 (Phone)

HEC Paris ( email )

France
33146476045 (Phone)

Marie E. Sushka

Arizona State University ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States
602-965-3131 (Phone)
602-965-8539 (Fax)

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