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 contrast it with equity. First, unlike asset purchasers, equity investors own a claim to the firm's 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.