Asset Sales and Firm Value: Evidence from Bond Markets

Abstract

Asset sales have been found to create significant abnormal returns of 0.5% - 1.5% on equity values. Several theories have been suggested to explain this result. Originally, the abnormal returns were attributed to efficient redistribution of assets. Later papers suggested that asset sales created value through an increase in focus or only when the proceeds were paid out due to agency costs. Asset sales may also create value from wealth transfers through asset substitution or due to the elimination of financial constraints and thus from an increase in financial flexibility for the selling firm. Theses theories all suggest that asset sales create equity value; however they have different implications for bond value. This paper examines 452 asset sales of at least $75 million from 1990 - 2004. We examine both the bond and equity abnormal returns. We find that asset sale generally create value for both debt and equity holders or neither, but we do not find evidence of wealth transfers. Firms with junk bonds, high leverage, low market-to-book, and low profitability all have significantly higher debt and equity returns from asset sales. We find that the primary determinant of excess bond value reactions is junk bond status and leverage. We find that the primary determinant of equity value excess return is junk bond status and relative transaction size. This evidence is consistent with firms that have financial constraints benefiting the most from asset sales. This suggest that a desire to increase financial flexibility may be a significant determinate of value creation from asset sales.