Working Paper: NBER ID: w4654
Authors: Lany Lang; Annette Poulsen; René M. Stulz
Abstract: We argue that management sells assets when doing so provides the cheapest funds to pursue its objectives rather than for operating efficiency reasons alone. This hypothesis suggests that (1) firms selling assets have high leverage and/or poor performance, (2) a successful asset sale is good news and (3) the stock market discounts asset sale proceeds retained by the selling firm. In support of this hypothesis, we find that the typical firm in our sample performs poorly before the sale and that the average stock-price reaction to asset sales is positive only when the proceeds are paid out.
Keywords: Asset Sales; Firm Performance; Agency Costs; Managerial Discretion
JEL Codes: G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high leverage, poor performance (D29) | asset sales (H82) |
| successful asset sales (proceeds used to pay down debt) (G32) | positive stock market reaction (G10) |
| successful asset sales (proceeds retained) (G32) | negative stock market reaction (G10) |
| completion of asset sale (G32) | market's perception of asset value (G10) |