Selling to buy: Asset sales, acquisition financing, and value creation

Abstract

In line with increased liquidity offered by asset sales, our findings show that firms selling large assets prior to acquisitions are more likely to use cash as payment method. Additionally, we find that in subsequent cash acquisitions, firms using cash stemming from asset sales experience higher announcement abnormal returns compared to firms using cash from other sources of funds, such as internally generated cash flows, debt financing, and equity issuance, which are linked to agency costs and information asymmetry effects. The higher wealth effects suggest that funds from asset sales are inflicted with relatively lower adverse valuation effects that are associated with other sources of funds.