Wealth Effects for Buyers and Sellers of the Same Divested Assets

• Published in: Financial management 1992-12, Vol.21 (4), p.119-128
• Main Authors: Sicherman, Neil W., Pettway, Richard H.
• Format: Article
• Language: English
• Subjects: Abnormal returns; Acquisitions & mergers; Asset acquisitions; Asset management; Asymmetry; Corporate divestiture; Credit; Credit ratings; Disclosure; Divestiture; Finance; Financial management; Financial transactions; Hypotheses; Impacts; Investment strategies; Market prices; Prices and rates; Rates of return; Shareholders; Shareholders wealth; Statistical analysis; Stockholders; Stocks; Studies; Wealth; Wealth effect
• ISSN: 0046-3892; 1755-053X
• DOI: 10.2307/3665845

There has been a major restructuring of corporate assets over the past decade in America. Some of the most notable restructuring activity includes mergers of whole firms. However, much restructuring involves the selling and/or buying of units, divisions, and selected assets of firms. These types of nonmerger restructuring of divisions and assets are called sell-offs and/or diverstitures and are the focus of this study. Sell-offs typically occur to strategically realign the firms' assets and streamline operations or to raise capital for firms in financial difficulty or close to financial distress. Moreover, the sales of divisions or divested assets are often made without competitive bids from more than one firm. Often the price of the transaction is not made public at the announcement of the divestiture. There have been other studies that have measured the wealth impacts of divestitures on the buyers and sellers separately, but the purpose of this paper is to measure the wealth effects of both the buyers and sellers of the same divested assets to determine how these wealth gains are shared among buyers and sellers in a controlled sample of matched pairs. Additionally, our analysis measures the wealth impacts of two major factors that may affect how shareholders react to sell-off announcements. The first factor analyzed is the change in the financial condition of the selling firm. Firms in declining financial condition (i.e., decreases in expected cash flows) will find it more expensive to raise cash through the capital markets and may employ a sell-off to raise the needed cash. The divesting firm may lose negotiating power if a credit downgrade informs potential buyers of the seller's weakened financial condition. Our results indicate that downgraded divesting firms experience significantly lower share price increases than divesting firms that have not been downgraded. Downgraded sellers experience average abnormal price increases of 0.37% and nondowngraded sellers have average abnormal price increases of 1.13% at sell-off announcements. We also find that credit downgrades for sellers do not explain share price changes for firms that buy divested assets. The second factor analyzed is the failure to publicly disclose the transaction prices paid for the divested assets. Stockholders' wealth responses to sell-off announcements will be conditioned on their perception of whether a fair price was paid (received) for the divested assets. Our research finds that di