Financing Through Asset Sales

Financing Through Asset Sales

Alex Edmans, William Mann

Series number :

Serial Number: 
344/2013

Date posted :

January 01 2013

Last revised :

October 09 2017
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Keywords

  • Asset sales • 
  • financing • 
  • pecking order • 
  • synergies

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 (1984), 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.

Authors

Real name: 
William Mann