Financing Through Asset Sales

Alex Edmans and William Mann

No 9720, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Most research on firm financing studies the choice between debt and equity. We model an alternative source -- non-core asset sales -- and 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 non-core 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 motivated by operational reasons ? dissynergies ? and thus receive a higher 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").

Keywords: Asset sales; Financing; Pecking order; Synergies (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Financing Through Asset Sales (2019)
Working Paper: Financing Through Asset Sales (2013)
Working Paper: Financing through Asset Sales (2012)
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