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Carlton, Anthony

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  • Paper Title: Raising External Finance to Repay Debt: Choosing between Selling Assets or Raising Equity.
  • Department Affiliation: Applied Finance Centre
  • Supervisors’ Names:
    • Associate Professor Geoff Loudon
    • Associate Professor Rob Trevor

Purpose:

Asset sales motivated by financial constraints are common. The accepted view in the literature is that assets sold via trade sale do so at an average 30% discount. Why would a company sell an asset at a 30% discount, rather than simply raise external equity? The general assumption is that equity markets are not accessible or too costly, either due to market conditions or the firm’s own financial condition. This paper tests this proposition by analysing the choice a listed company makes between asset sales or selling external equity, via a seasoned equity offering.

Originality:

The impact of limited access to credit markets and the IPO market has been tested. This study will be the first, to the author’s knowledge, to directly test the choice of selling assets and issuing seasoned equity. Given that the transactions costs of raising equity are generally less than 30%, this research contribute to our understanding of the cost of financial constraints. 

Key literature/theoretical perspective:

Approximately of 40% of asset sales and 30% of SEO’s have the stated purpose of debt reduction.  The choice between these funding alternatives will be influenced by conditions in the equity and real asset markets, the impact of firm specific asymmetrical information and adverse selection, and behavioural considerations including security mispricing and managerial optimism. Firm specific characteristics, such as the degree of relatedness between a firm’s assets and the tax impact of an asset sale are also expected to impact on the choice between selling an asset and selling equity.

Design / methodological approach:

We use discrete choice models to explain the choice of fund raising method using variables measuring asset specific, industry related and firm related characteristics, as well as market conditions. The sample comprises United States companies that have either sold assets or issued equity for the stated purpose of repaying debt, over the period 2000 to 2008. The empirical strategy addresses the issue of self-selection, as well as the nested nature of these decisions. For example, firms simultaneously decide on the form of equity (or asset) sale method when they decide between selling assets or raising equity. 

Findings:

Not yet available.

Research limitations / implications:

Not yet available

Practical and Social Implications:

Selling assets at substantial discounts represents a friction in the efficient allocation of capital within an economy. This research will help us understand the impact of market imperfections on investment decisions by examining the impact of financial constraints, asymmetrical information and security mispricing on real decisions, in this case the sale of assets. It will also shed light on the equity issuance decision and the indirect costs involved.

Keywords:

divestitures, SEO, liquidity discount, use of proceeds, financial constraints