Financing, fire sales, and the stockholder wealth effects of asset divestiture announcements

Finlay, W., Marshall, A. and McColgan, P. (2018) Financing, fire sales, and the stockholder wealth effects of asset divestiture announcements. Journal of Corporate Finance, 50, pp. 323-348. (doi: 10.1016/j.jcorpfin.2016.09.005)

Abstract

We examine the impact of financial distress conditions at the individual firm level, the operating industry level, and economy-wide, on the stock price reaction to divestment announcements. This allows us to isolate distinct fire sale and financing theoretical explanations of asset divestments. We find that abnormal returns are significantly lower when firms divest assets during periods of industry-wide distress. During these periods the natural buyers of the divested assets are likely to have liquidity constraints, and so selling firms receive a lower price (Shleifer and Vishny, 1992). Fire sale effects from divestments are driven by financially constrained firms, firms selling core assets, small firms, and increase with deal size. We find some support for the financing explanation of the stock price response to divestments during periods of overlapping firm-level and economy-wide financial distress conditions, suggesting that divesting assets reduce the expected value of bankruptcy costs for selling firms under these conditions.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Finlay, Dr William
• Authors: Finlay, W., Marshall, A., and McColgan, P.
• Subjects: H Social Sciences > HG Finance
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Research Group: Finance
• Journal Name: Journal of Corporate Finance
• Publisher: Elsevier
• ISSN: 0929-1199
• ISSN (Online): 1872-6313
• Published Online: 21 September 2016
• Copyright Holders: Copyright © 2016 Elsevier B.V.
• First Published: First published in Journal of Corporate Finance 50: 323-348
• Publisher Policy: Reproduced in accordance with the publisher copyright policy