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Asset Sales, Investment Opportunities, and the Use of Proceeds

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  • THOMAS W. BATES
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    Abstract

    This study examines the allocation of cash proceeds following 400 subsidiary sales between 1990 and 1998. Retention probabilities are increasing in the divesting firm's contemporaneous growth opportunities and expected investment. Retaining firms, however, also systematically overinvest relative to an industry benchmark. Shareholder returns to retention decisions are positively correlated with growth opportunities and benchmarked investment, but negatively correlated with benchmarked investment for firms with poor growth opportunities. Shareholder returns to debt distributions are increasing in industry-benchmarked leverage. Overall, the results of this study cohere with the hypothesized trade-off between the investment efficiencies associated with retained proceeds and the agency costs of managerial discretion and debt. Copyright 2005 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 60 (2005)
    Issue (Month): 1 (02)
    Pages: 105-135

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    Handle: RePEc:bla:jfinan:v:60:y:2005:i:1:p:105-135

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    Cited by:
    1. Arnold, Marc & Hackbarth, Dirk & Puhan, Tatjana-Xenia, 2013. "Financing Asset Sales and Business Cycles," Working Papers on Finance 1320, University of St. Gallen, School of Finance.
    2. Ding, Sai & Guariglia, Alessandra & Knight, John, 2010. "Does China overinvest? Evidence from a panel of Chinese firms," SIRE Discussion Papers 2010-110, Scottish Institute for Research in Economics (SIRE).
    3. Officer, Micah S., 2007. "The price of corporate liquidity: Acquisition discounts for unlisted targets," Journal of Financial Economics, Elsevier, vol. 83(3), pages 571-598, March.
    4. Sibilkov, Valeriy & Straska, Miroslava & Waller, H. Gregory, 2013. "The value implications of restrictions on asset sales," Review of Financial Economics, Elsevier, vol. 22(3), pages 98-108.
    5. Mouzas, Stefanos, 2006. "Efficiency versus effectiveness in business networks," Journal of Business Research, Elsevier, vol. 59(10-11), pages 1124-1132, October.
    6. Alain Praet, 2011. "Voluntary firm restructuring: why do firms sell or liquidate their subsidiaries?," Annals of Finance, Springer, vol. 7(4), pages 449-476, November.
    7. Hirth, Stefan & Uhrig-Homburg, Marliese, 2010. "Investment timing, liquidity, and agency costs of debt," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 243-258, April.
    8. Oswald, Dennis & Young, Steven, 2008. "Share reacquisitions, surplus cash, and agency problems," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 795-806, May.
    9. Ranadeb Chaudhuri & Hoontaek Seo, 2010. "Classified Boards and Managerial Entrenchment: Evidence from Seasoned Equity Offerings," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 9(1), pages 29-43, April.
    10. Praet, Alain, 2013. "Family firms and the divestment decision: An agency perspective," Journal of Family Business Strategy, Elsevier, vol. 4(1), pages 34-41.
    11. Jonathan Wiley & Brandon Cline & Xudong Fu & Tian Tang, 2012. "Valuation Effects for Asset Sales," Journal of Financial Services Research, Springer, vol. 41(3), pages 103-120, June.
    12. USHIJIMA Tatsuo & Ulrike SCHAEDE, 2013. "The Market for Corporate Subsidiaries in Japan: An empirical study of trades among listed firms," Discussion papers 13012, Research Institute of Economy, Trade and Industry (RIETI).
    13. Jacques Sarremejeanne, 2011. "Les d├ęterminants financiers des cessions-bail," Post-Print hal-00650571, HAL.
    14. Shin, G. Hwan, 2008. "The profitability of asset sales as an explanation of asset divestitures," Pacific-Basin Finance Journal, Elsevier, vol. 16(5), pages 555-571, November.
    15. Warusawitharana, Missaka, 2008. "Corporate asset purchases and sales: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 87(2), pages 471-497, February.
    16. Olga Kuzmina, 2013. "Operating Flexibility and Capital Structure: Evidence from a Natural Experiment," Working Papers w0197, Center for Economic and Financial Research (CEFIR).
    17. Berg, Aron & Norb├Ąck, Pehr-Johan & Persson, Lars, 2012. "International Mergers with Financially Constrained Owners," Working Paper Series 927, Research Institute of Industrial Economics.
    18. D'Mello, Ranjan & Miranda, Mercedes, 2010. "Long-term debt and overinvestment agency problem," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 324-335, February.
    19. Jackson, Scott B. & Rodgers, Theodore C. & Tuttle, Brad, 2010. "The effect of depreciation method choice on asset selling prices," Accounting, Organizations and Society, Elsevier, vol. 35(8), pages 757-774, November.

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