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Financing Asset Sales and Business Cycles
[Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries]

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  • Marc Arnold
  • Dirk Hackbarth
  • Tatjana Xenia Puhan

Abstract

Using a dynamic model of financing, investment, and macroeconomic risk, we investigate when firms sell assets to fund investments (financing asset sales) across the business cycle. Equity financed investment transfers wealth from equity to debt because asset volatility declines and earnings increase when firms invest. Financing asset sales reduce asset collateral and, hence, transfer wealth back from debt to equity. Exploring the dynamics of the heretofore overlooked “asset sale versus external equity” financing margin across business cycles helps explain novel stylized facts about asset sales and their business cycle patterns that cannot be rationalized by traditional motives for selling assets.

Suggested Citation

  • Marc Arnold & Dirk Hackbarth & Tatjana Xenia Puhan, 2018. "Financing Asset Sales and Business Cycles [Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries]," Review of Finance, European Finance Association, vol. 22(1), pages 243-277.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:1:p:243-277.
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