Financing Through Asset Sales

Edmans, A and Mann, W (2019) Financing Through Asset Sales. Management Science, 65 (7). pp. 3043-3060. ISSN 0025-1909 OPEN ACCESS


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.

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Item Type: Article
Subject Areas: Finance
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© 2017 INFORMS

Date Deposited: 11 Oct 2017 12:09
Date of first compliant deposit: 18 Oct 2017
Subjects: Financing
Last Modified: 30 Oct 2023 01:41

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