Financing Through Asset Sales

Alex Edmans and William Mann ()
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William Mann: University of California, Los Angeles, Los Angeles, California 90095

Management Science, 2019, vol. 65, issue 7, 3043-3060

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 [Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J. Financial Econom. 13(2):187–221], 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; equity issuance (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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https://doi.org/10.1287/mnsc.2017.2981 (application/pdf)

Related works:
Working Paper: Financing Through Asset Sales (2013)
Working Paper: Financing Through Asset Sales (2013)
Working Paper: Financing through Asset Sales (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:7:p:3043-3060

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