Financing Asset Sales and Business Cycles*

Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries

Marc Arnold, Dirk Hackbarth and Tatjana Xenia Puhan

Review of Finance, 2018, vol. 22, issue 1, 243-277

Abstract: Using a dynamic model of financing, investment, and macroeconomic risk, we investigate when firms sell assets to fund investments (financing asset sales) across the business cycle. Equity financed investment transfers wealth from equity to debt because asset volatility declines and earnings increase when firms invest. Financing asset sales reduce asset collateral and, hence, transfer wealth back from debt to equity. Exploring the dynamics of the heretofore overlooked “asset sale versus external equity” financing margin across business cycles helps explain novel stylized facts about asset sales and their business cycle patterns that cannot be rationalized by traditional motives for selling assets.

Keywords: Asset sales; Business cycle; Financial policy; Real options (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Financing Asset Sales and Business Cycles (2014)
Working Paper: Financing Asset Sales and Business Cycles (2013)
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