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Asset sales, firm performance, and the agency costs of managerial discretion

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  • Lang, Larry
  • Poulsen, Annette
  • Stulz, Rene

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 37 (1995)
Issue (Month): 1 (January)
Pages: 3-37

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Handle: RePEc:eee:jfinec:v:37:y:1995:i:1:p:3-37

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Web page: http://www.elsevier.com/locate/inca/505576

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References

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  1. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
  2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Robert A. Korajczyk & Deborah J. Lucas & Robert L. McDonald, 1989. "Understanding Stock Price Behavior around the Time of Equity Issues," NBER Working Papers 3170, National Bureau of Economic Research, Inc.
  4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  6. Paul Asquith & Robert Gertner & David Scharfstein, 1991. "Anatomy of Financial Distress: An Examination of Junk-Bond Issuers," NBER Working Papers 3942, National Bureau of Economic Research, Inc.
  7. Boot, Arnoud W A, 1992. " Why Hang on to Losers? Divestitures and Takeovers," Journal of Finance, American Finance Association, vol. 47(4), pages 1401-23, September.
  8. Hart, O. & Moore, J., 1990. "A Theory Of Corporate Financial Structure Based On The Seniority Of Claims," Working papers 560, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, vol. 24(1), pages 137-154, September.
  10. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
  11. McConnell, John J. & Muscarella, Chris J., 1985. "Corporate capital expenditure decisions and the market value of the firm," Journal of Financial Economics, Elsevier, vol. 14(3), pages 399-422, September.
  12. Hite, Gailen L. & Owers, James E. & Rogers, Ronald C., 1987. "The market for interfirm asset sales : Partial sell-offs and total liquidations," Journal of Financial Economics, Elsevier, vol. 18(2), pages 229-252, June.
  13. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  14. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  15. Jain, Prem C, 1985. " The Effect of Voluntary Sell-off Announcements on Shareholder Wealth," Journal of Finance, American Finance Association, vol. 40(1), pages 209-24, March.
  16. Lehn, Kenneth & Poulsen, Annette, 1989. " Free Cash Flow and Stockholder Gains in Going Private Transactions," Journal of Finance, American Finance Association, vol. 44(3), pages 771-87, July.
  17. Alexander, Gordon J & Benson, P George & Kampmeyer, Joan M, 1984. " Investigating the Valuation Effects of Announcements of Voluntary Corporate Selloffs," Journal of Finance, American Finance Association, vol. 39(2), pages 503-17, June.
  18. Ben S. Bernanke & John Y. Campbell, 1988. "Is There a Corporate Debt Crisis?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 83-140.
  19. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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