Equity and Cash in Intercorporate Asset Sales: Theory and Evidence
Year: 2008
Type: article
Abstract: We develop a two-sided asymmetric information model of asset sales that incorporates the key differences from mergers and allows the information held by each party to be impounded in the transaction. Buyer information is conveyed through a first-stage competitive auction. A seller with unfavorable information about the asset accepts the cash offer of the highest bidder. A seller with favorable information proposes a take-it-or-leave-it counteroffer that entails buyer equity. Thus, the cash-equity decision reflects seller, but not buyer, information in contrast to the theoretical and empirical findings for mergers. The central prediction of our model is that there are large gains in wealth for both buyers and sellers in equity-based asset sales, whereas cash sales generate significantly smaller gains that typically accrue only to sellers. Our empirical results are consistent with the predictions of our theoretical model.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhm086
Institutions: HEC Paris, Arizona State University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2084568902