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Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

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  • Robert C. Hanson
  • Moon H. Song
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    Abstract

    We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets. Copyright 2006, The Eastern Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6288.2006.00147.x
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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal Financial Review.

    Volume (Year): 41 (2006)
    Issue (Month): 3 (08)
    Pages: 361-386

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    Handle: RePEc:bla:finrev:v:41:y:2006:i:3:p:361-386

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    Web page: http://www.easternfinance.org/
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    Web: http://www.blackwellpublishing.com/subs.asp?ref=0732-8516

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    Cited by:
    1. Pascal Nguyen & Nahid Rahman, 2014. "Which Governance Characteristics Affect the Incidence of Divestitures in Australia?," Working Paper Series 180, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Nguyen, Pascal & Rahman, Nahid & Zhao, Ruoyun, 2013. "Ownership structure and divestiture decisions: Evidence from Australian firms," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 170-181.
    3. Pascal Nguyen, 2013. "The role of firm performance in the market reaction to divestiture announcements," Economics Bulletin, AccessEcon, vol. 33(3), pages 1723-1728.
    4. Post Raj Pokharel, 2013. "Managerial Entrenchment and Capital Structure Decision: A Case of Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(2), pages 78-89, October.

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