RFS Advance Access first published online on January 5, 2008
This version published online on January 12, 2008
Review of Financial Studies, doi:10.1093/rfs/hhm086
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Equity and Cash in Intercorporate Asset Sales: Theory and Evidence
HEC School of Management, Paris
Arizona State University; HEC School of Management, Paris
Address correspondence to Ulrich Hege, HEC School of Management, Paris, Department of Finance & Economics, 1 Rue de la Libération, 78351 Jouy-en-Josas Cedex, France; telephone: 33-1-39-67-72-99; fax: 33-1-39-67-70-85, e-mail: hege{at}hec.fr
JEL Classification: D44, G34
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Abstract |
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We 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. The buyer's 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 the seller's but not the buyer's information in contrast to the theoretical and empirical findings for mergers. The central prediction of our model is that there are large gains in wealth for both buyers and sellers in equity-based asset sales, whereas cash sales generate significantly smaller gains that typically accrue only to sellers. Our empirical results are consistent with the predictions of our theoretical model.
The authors thank an anonymous referee for insightful comments and suggestions that substantially improved the paper, and thank Matthew Spiegel, the editor, for valuable guidance and perceptive observations. Hege is affiliated with ECGI; Europlace Institute of Finance and GREGHEC. Lovo is affiliated with GREGHEC.