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Equity and cash in intercorporate asset sales : theory and evidence

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  • Hege, Ulrich

    ()

  • Lovo, Stefano

    ()

  • Slovin, Myron
  • Sushka, Marie

Abstract

the authors develop a two-sided asymmetric information model of asset sales that incorporates the key differences from mergers and allows the information held by each party to be impounded in the transaction. Buyer information is conveyed through a first-stage competitive auction. A seller with unfavorable information about the asset accepts the cash offer of the highest bidder. A seller with favorable information proposes a take-it-or-leave-it counteroffer that entails buyer equity. Thus, the cash-equity decision reflects seller, but not buyer, information in contrast to theoretical and empirical findings for mergers. The central prediction of our model is that there are relatively large gains in wealth for both buyers and sellers in equity-based asset sales, whereas cash asset sales generate significantly smaller gains that typically accrue only to sellers. Our empirical results are consistent with the predictions of our theoretical model.

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Bibliographic Info

Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 859.

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Length: 46 pages
Date of creation: 01 Dec 2006
Date of revision:
Handle: RePEc:ebg:heccah:0859

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Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
Web page: http://www.hec.fr/
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Keywords: Asset sales; means of payment; auctions; two-sided asymmetric information;

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References

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Citations

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Cited by:
  1. Shachat, Jason & Tan, Lijia, 2012. "An experimental investigation of auctions and bargaining in procurement," MPRA Paper 42409, University Library of Munich, Germany.
  2. Jory, Surendranath R. & Madura, Jeff & Ngo, Thanh N., 2012. "Deal structure decision in the global market for divested assets," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 104-116.
  3. Kien Cao & Jeff Madura, 2011. "Determinants of the Method of Payment in Asset Sell‐Off Transactions," The Financial Review, Eastern Finance Association, vol. 46(4), pages 643-670, November.
  4. Uysal, Vahap B., 2011. "Deviation from the target capital structure and acquisition choices," Journal of Financial Economics, Elsevier, vol. 102(3), pages 602-620.
  5. Chen, Fan & Sanger, Gary C. & Slovin, Myron B., 2013. "Asset sales in the mutual fund industry: Who gains?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4834-4849.
  6. Hege, Ulrich & Lovo, Stefano & Slovin, Myron B. & Sushka, Marie E., 2009. "Asset sales and the role of buyers: strategic buyers versus private equity," MPRA Paper 39549, University Library of Munich, Germany, revised Feb 2012.

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