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The profitability of asset sales as an explanation of asset divestitures

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  • Shin, G. Hwan
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    Abstract

    Using Korean fixed asset divestiture data, I extend the investigation of the financing hypothesis of divestitures proposed by Lang et al. (Lang, L., Poulsen, A., Stulz, R., 1995. Asset sales, firm performance, and the agency costs of managerial discretion, Journal of Financial Economics 37, 3.37). In particular, I take into account the profitability of announced asset divestitures and I employ a unique sample constructed to avoid effects that might confound the results. I also take into account the financial condition of the selling firms. The results are consistent with the financing hypothesis proposed by Lang et al. and show that the financing hypothesis of divestitures is robust to controls for the profitability of asset sales and the financial condition of selling firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 16 (2008)
    Issue (Month): 5 (November)
    Pages: 555-571

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    Handle: RePEc:eee:pacfin:v:16:y:2008:i:5:p:555-571

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    Web page: http://www.elsevier.com/locate/pacfin

    Related research

    Keywords: Asset sales Divestitures Financing hypothesis Profitability of asset sales Korean firms;

    References

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    1. John, Kose & Ofek, Eli, 1995. "Asset sales and increase in focus," Journal of Financial Economics, Elsevier, vol. 37(1), pages 105-126, January.
    2. Klein, April, 1986. " The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects," Journal of Finance, American Finance Association, vol. 41(3), pages 685-96, July.
    3. Jeffrey W. Allen & John J. McConnell, 1998. "Equity Carve-Outs and Managerial Discretion," Journal of Finance, American Finance Association, vol. 53(1), pages 163-186, 02.
    4. Thomas W. Bates, 2005. "Asset Sales, Investment Opportunities, and the Use of Proceeds," Journal of Finance, American Finance Association, vol. 60(1), pages 105-135, 02.
    5. Clubb, Colin & Stouraitis, Aris, 2002. "The significance of sell-off profitability in explaining the market reaction to divestiture announcements," Journal of Banking & Finance, Elsevier, vol. 26(4), pages 671-688, April.
    6. Daley, Lane & Mehrotra, Vikas & Sivakumar, Ranjini, 1997. "Corporate focus and value creation Evidence from spinoffs," Journal of Financial Economics, Elsevier, vol. 45(2), pages 257-281, August.
    7. Kim, Kenneth & Rhee, S Ghon, 1997. " Price Limit Performance: Evidence from the Tokyo Stock Exchange," Journal of Finance, American Finance Association, vol. 52(2), pages 885-99, June.
    8. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
    9. Neil W. Sicherman & Richard H. Pettway, 1992. "Wealth Effects for Buyers and Sellers of the Same Divested Assets," Financial Management, Financial Management Association, vol. 21(4), Winter.
    10. Lang, Larry & Poulsen, Annette & Stulz, Rene, 1995. "Asset sales, firm performance, and the agency costs of managerial discretion," Journal of Financial Economics, Elsevier, vol. 37(1), pages 3-37, January.
    11. 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.
    12. Timothy A. Kruse, 2002. "Asset Liquidity and the Determinants of Asset Sales by Poorly Performing Firms," Financial Management, Financial Management Association, vol. 31(4), Winter.
    13. Lehmann, B.N., 1989. "Commentary: Volatility, Price Resolution, And The Effectiveness Of Price Limits," Papers t9, Columbia - Center for Futures Markets.
    14. 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.
    15. Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, vol. 53(3), pages 939-978, 06.
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    Cited by:
    1. Evžen Kocenda & Jan Hanousek, 2011. "Divide and Privatize: Firm Break-up and Performance," CESifo Working Paper Series 3465, CESifo Group Munich.
    2. Evžen Kočenda & Jan Hanousek, 2011. "Effect of the Czech Firms Break-Up on their Profitability and Productivity," Politická ekonomie, University of Economics, Prague, vol. 2011(5), pages 579-598.

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