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Financing through asset sales

Journal

Management Science

Subject

Finance

Authors / Editors

Edmans A;Mann W

Biographies

Publication Year

2018

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 (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.

Keywords

Asset sales; Financing; Pecking order; Synergies

Available on ECCH

No


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