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Financing asset sales and business cycles


Puhan, Tatjana-Xenia; Arnold, Marc; Hackbarth, Dirk (2014). Financing asset sales and business cycles. Swiss Finance Institute Research Paper 14-11, University of Zurich.

Abstract

This paper analyzes the decision of firms to sell assets to fund investments (financing asset sales). For a sample of U.S. manufacturing firms during the 1971-2010 period, we document new stylized facts about financing asset sales that cannot be explained by traditional motives for selling assets, such as financial distress or financing constraints. Using a structural model of financing, investment, and macroeconomic risk, we show that financing asset sales attenuate the debt overhang problem, because asset sale financed investments imply lower wealth Transfers from equity to debt than otherwise identical but equity financed investments. This novel motive to reduce the debt overhang problem can explain how financing asset sales relate to firm characteristics and business cycles. We also confirm with simulated panels of model firms that are structurally similar to their empirical counterpart that they indeed feature the dynamic patterns of financing asset sales we observe in the data for real firms.

Abstract

This paper analyzes the decision of firms to sell assets to fund investments (financing asset sales). For a sample of U.S. manufacturing firms during the 1971-2010 period, we document new stylized facts about financing asset sales that cannot be explained by traditional motives for selling assets, such as financial distress or financing constraints. Using a structural model of financing, investment, and macroeconomic risk, we show that financing asset sales attenuate the debt overhang problem, because asset sale financed investments imply lower wealth Transfers from equity to debt than otherwise identical but equity financed investments. This novel motive to reduce the debt overhang problem can explain how financing asset sales relate to firm characteristics and business cycles. We also confirm with simulated panels of model firms that are structurally similar to their empirical counterpart that they indeed feature the dynamic patterns of financing asset sales we observe in the data for real firms.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:19 February 2014
Deposited On:20 Feb 2015 09:34
Last Modified:08 Dec 2017 11:17
Series Name:Swiss Finance Institute Research Paper
Number of Pages:62
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2356377
Other Identification Number:merlin-id:9539

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