What is the Magic in An Equity Deal? Theory and Evidence on the Means of Payment in Asset Sales by Ulrich Hege HEC School of Management Stefano Lovo HEC School of Management Myron Slovin Louisiana State University and HEC Marie Sushka * Arizona State University and HEC
November 3, 2004
* Corresponding author: Marie E. Sushka, Department of Finance, Box 873906, College of Business, Arizona State University, Tempe, AZ 85287-3906, Telephone (480) 965-6581, Fax (480) 965-8539, Email: marie.sushka@asu.edu.
What is the Magic in An Equity Deal? Theory and Evidence on the Means of Payment in Asset Sales Abstract This paper explains the puzzling role of equity in asset sales. Contrary to evidence for mergers and takeovers, intercorporate asset sales in which equity is a means of payment are associated with large positive share price reactions for both buyers and sellers, whereas cash asset sales generate significantly smaller gains in wealth that typically accrue only to sellers. To explain such results, we develop a general asymmetric information model, and show that the identity of the informed party is crucial to the effect of equity as a means of payment. To test our predictions, we construct a comprehensive sample of intercorporate asset sales, including a set of transactions in which buyer equity is a means of payment but no corporate blockholdings are formed. Our empirical findings strongly support our predictions and imply that in asset sales it is the seller that has an informational advantage over the buyer, not vice versa.
Keywords: Asset sales, divestitures, means of payment, equity issuance. JEL classification: G32, G34.