Financing Through Asset Sales

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 [Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J. Financial Econom. 13(2):187–221], 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. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2981 . This paper was accepted by Tomasz Piskorski, finance.