Asset sales and firm strategy: an analysis of divestitures by UK companies

This paper examines the financial causes and consequences of the decision to sell-off non-financial assets as part of a new or ongoing restructuring programme by UK non-financial companies between 1993 and 2000. We report that asset sales follow a period of declining operating returns and tend to occur in diversified companies with high levels of financial leverage. Stock prices respond positively to asset sale announcements. This arises due to improvements in operating returns and a decline in financial leverage and corporate diversification subsequent to the disposal. Our findings suggest that asset sales represent an effective operational response to a firm's poor financial condition. However, we also find that a manager's decision to sell assets is strongly influenced by the explicit threats to their control from lenders and competition from product, labour and takeover markets.     

The value implications of restrictions on asset sales

This paper examines the effect of restrictions over asset disposition, measured by the ratio of secured debt to fixed assets, on firm value. We find evidence consistent with two non-mutually exclusive hypotheses. (1) Restrictions on the disposition of assets reduce firm value by limiting a firm's ability to restructure assets or to raise funds to finance higher NPV projects. (2) Restrictions on asset disposition increase firm value by limiting agency costs of managerial discretion over uncommitted assets. The net effect of restrictions over asset disposition on firm value is determined by potential agency problems and the need for operating flexibility.     

The market for interfirm asset sales: Partial sell-offs and total liquidations

We investigate the valuation consequences of voluntary proposals to sell part or all of a corporation's assets. For partial sell-offs, successful sellers and buyers reap statistically significant abnormal returns of 1.66% and 0.83%, respectively. Unsuccessful sellers realize gains at the bid announcement of 1.41% that are lost at the offer termination. In contrast, proposals to liquidate the firm are associated with significant average abnormal returns of 12.24%. We interpret these findings as evidence that asset sales are associated with the movement of resources to higher-valued uses rather than as evidence of market mispricing before the divestiture announcements.     

Analysing the wealth effects of UK divestitures: An examination of domestic and international sales

Here we analyse divestiture announcement effects for UK multinational corporations accounting for the location of the unit sold. We find some bias in market reactions with larger abnormal returns for UK divestitures when compared to overseas sales. US sales generate larger returns than those in Continental Europe or the Asia-Pacific region. We analyse the determinants of abnormal returns using accounting and transaction data, supplemented with country specific data for overseas sales. Abnormal returns for UK sales are explained by financial characteristics of the selling firm but the size of the transaction relative to the firm is the most significant factor in overseas divestitures.     

The value of financing through cross-border asset sales: Shareholder returns and liquidity

We examine a sample of 1458 divestitures of domestic assets by U.S. firms to foreign and domestic buyers over the period 1998–2008. Cross-border asset sales yield higher abnormal returns to the seller than domestic sales. This incremental return is driven by liquidity-seeking sellers engaging in cross-border transactions. Larger seller returns in these international deals are associated with favorable economic conditions in foreign buyers' home markets relative to the U.S. We also find positive abnormal returns for buyers, albeit smaller than seller returns, but no significant difference between buyer returns in cross-border and domestic transactions.     

Corporate asset purchases and sales: Theory and evidence

Purchases and sales of operating assets by firms generated $162 billion for shareholders over the past 20 years. This contrasts sharply with the evidence on mergers. This paper characterizes the behavior of value-maximizing firms, which could grow organically, purchase existing assets, or sell assets. The approach yields an endogenous selection model that links asset purchases and sales to fundamental properties of the firm. Empirical tests confirm the predictions of the model. In particular, return on assets and size strongly predict when firms purchase or sell assets, and the transaction size covaries with the value of capital employed by the firm. These findings indicate that corporate asset purchases and sales are consistent with efficient investment decisions.     

A cultural explanation of the foreign bias in international asset allocation

This paper examines the foreign bias in international asset allocation. Following extant literature in behavioral finance, we argue that a society’s culture and the cultural distance between two markets play an important role in explaining the foreign bias. In particular, we hypothesize that the degree of a nation’s uncertainty avoidance affects the foreign bias (more uncertainty-avoiding countries allocate less to foreign markets), as does the degree of a country’s individualism (in individualistic countries performance is more directly attributed to a person and less to teams, causing these individuals to be more aggressive in their foreign asset allocations). We further expect that the degree of cultural distance between two countries affects the amount of money allocated to that market. Based on extensive robustness analyses, we find support for our hypotheses on the role of culture in international asset allocation.     

Government asset sales,economic nationalism,and acquirer wealth effects

We analyze acquirer wealth effects using a comprehensive sample of government asset sale announcements in 123 countries around the world in 1984–2009. Overall, we find positive abnormal returns to acquirers of state-owned assets. Returns are greater when the acquirer is domestic, when the sale occurs in a developing nation, and when the acquirer itself is not a former state-owned enterprise. Buyers of bailed-out firms experience average abnormal returns of 3.16%, compared to 0.70% for all other government sales. Our results suggest that the market favors acquirers that benefit from divesting governments driven by economic nationalism rather than sale revenue maximization.     

Level of multinationality as an explanation for post-announcement drift

This study tests whether the observed patterns in stock returns after quarterly earnings announcements are related to the level of multinationality, a variable used to proxy for earnings predictability. Our findings show that the level-of-multinationality variable is negatively correlated with the observed post-announcement abnormal returns. The findings suggest that the level of multinationality as a proxy for earnings predictability underlies the predictability of stock returns after earnings announcements.     

Optimum consumption and portfolio rules with money as an asset

This article generalizes Merton's optimum consumption and portfolio rules in continuous time by introducing money as a capital asset and allowing for uncertain inflation. Assuming that prices are log-normally distributed, a three-funds theorem is derived and the introduction of money is shown not to change the form of the standard inflation-adjusted CAPM but to change the market price of risk. The individual's consumption-portfolio problem is completely solved under uncertain inflation if his utility function is iso-elastic in its arguments. Comparative statics are used to assess the influence of changes in exogenous parameters on the individual's optimal rules.     

A note on non-performing loans as an indicator of asset quality

In 1983, the public was given its first opportunity to review bank asset quality in the form of non-performaing asset information. The purpose of this study is to evaluate that information. A regression analysis comparing the non-performing asset statistics with examiner classifications of assets suggests that the non-performing asset information can be useful aid in analyzing the asset quality of banks, particularly when the information is timely.     

Value creation from asset sales: New evidence from bond and stock markets

This paper examines the influence of capital structure change on the value creation from asset sales. We find significant positive equity and debt excess returns are concentrated in the subsample of highly leveraged firms that use the proceeds to retire debt. Low leverage firms display no consistent significant excess equity or bond returns. The existent literature has focused on efficiency redistribution, increase in focus, and access to capital for investment as the primary drivers of value creation from asset sales and agency costs as a major factor that mitigates this value creation. The evidence presented in this paper suggests that the primary driver of value creation is from capital structure change for highly leveraged firms.     

Profiting from government stakes in a command economy: Evidence from Chinese asset sales

We examine the market response to an unexpected announcement of the sale of government-owned shares in China. In contrast to earlier work, we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect from the policy's cancellation. We suggest that this results from the absence of a Chinese political transition to accompany economic reforms, so that the benefits of political ties outweigh the efficiency costs of government shareholdings. Companies managed by former government officials have positive abnormal returns, suggesting that personal ties can substitute for government ownership as a source of connections.     

The profitability of carry trades

The uncovered interest parity (UIP) condition suggests that carry trades whereby investors borrow in the low interest rate currency and invest in the high interest rate currency should not result in excess profits over the long run. In this paper, we test the significance of the conventional empirical failure of UIP condition. Using the four bilateral pound parities we fail to detect significant excess carry trade profits for the yen, euro and swiss franc–pound parities. The only parity for which the carry trade consistently makes excess profits is the dollar–pound parity. This result is somewhat surprising as this is the currency pair with the lowest interest rate differential. We are extremely grateful for the anonymous referee’s comments on this paper.     

The profitability of small single-market banks in an era of multi-market banking

This paper examines the relationship between the profitability of small single-market banks and the presence in the market of large banking organizations and banking organizations that operate primarily outside of the local banking market. We find that, in rural banking markets, the profitability of small single-market banks is significantly related to the presence of both large and small primarily-out-of-market banks. We also find that an increased presence of large or small primarily-out-of-market banks in rural banking markets reduces the positive effect of an increase in concentration on small single-market bank profits. This finding is consistent with theoretical predictions reported in the recent literature and has important implications for antitrust policy. In urban banking markets, we find little evidence of any relationship between the profitability of small single-market banks and the presence of large or primarily-out-of-market banks.     

Price determinants of Aboriginal art, and its role as an alternative asset class

This paper analyzes auction results for over 4000 paintings by Australian Aboriginal artists to investigate determinants of prices in the Aboriginal art market. This is the first financial study of an indigenous art market, and hedonic, repeat sales and hybrid regression analyses find it shares price determinants with traditional art markets (with price premia attached to artist name, death, painting size, leading auction house, and winter sale). However, Aboriginal art’s unique features significantly affect prices, particularly works that use traditional Aboriginal media and those with reputation-affirming traits. An Aboriginal Art Index provides 6.6% annual return (standard deviation 17.9%), which is comparable to traditional asset classes and superior on a risk-adjusted basis. Returns to Aboriginal art are negatively correlated with returns from other assets, and so it adds value to a diversified investment portfolio.     

The sales force as an information transfer mechanism for new service development in the Thai insurance industry

New service development (NSD) is becoming increasingly important as the insurance industry in many countries opens up and becomes more competitive. This paper examines how customer views are integrated into the NSD process in the Thai insurance industry. The qualitative research was conducted using in-depth interviews with top officers, sales managers, senior vice-presidents of marketing and actuary managers in a number of leading life insurance and non-life insurance companies. The interviews investigated how NSD works in the Thai industry, focusing on how customer views enter the process. The results showed that the NSD process in Thailand is not oriented towards developing truly innovative products, but there is much NSD for adaptation of products from other markets. Sales agents act as a main information transfer mechanism, bringing in customer views through the sales managers, who play a role in NSD. Lack of cross-functional teamwork can cause failure in developing new products and services.     

The information content of aggregate profitability

Recently, there has been significant interest in the information content of aggregate accounting profitability. I collect evidence on whether aggregate profitability captures information about changes in the cost of capital as predicted by classical investment theory. Consistent with these predictions, I find that the stock market return is negatively related to future accounting profitability for several years into the future. I provide evidence that this relation is most likely due to a positive association between changes in expected returns which exert a negative impact on stock returns and future profitability. These findings indicate that aggregate accounting profitability reflects significant economic content related to the cost of capital. This study is the first to link changes in accounting profitability to the market cost of capital under an investment-based mechanism.     

Firm investment,finance constraint and voluntary asset sales: the evidence from Indian manufacturing firms

This paper examines the importance of finance constraints for firm investment expenditures by looking at the investment-asset sales sensitivity in financially healthy Indian manufacturing firms. Voluntary asset sales is a cleaner indicator of firms' liquidity than cash flows since it is unlikely to influence firms' growth opportunities unless they are financially constrained. We take care of the endogeneity and the implicit monotonicity problems, which are much debated in the literature, by using an endogenous regime switching regression model. We find that the investment-asset sales sensitivity is significantly greater for firms that are likely to be financially constraints.