Asset Sales, Investment Opportunities, and the Use of Proceeds

Authors

  • THOMAS W. BATES

    1. 1Department of Finance, Alfred Lerner College of Business and Economics, University of Delaware, Newark, DE 19716
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    • Thomas W. Bates is at the Department of Finance, Alfred Lerner College of Business and Economics, University of Delaware, Newark, DE 19716. This paper has benefited from comments provided by Jeffrey Allen, Craig Dunbar, Rick Green (the editor), Kathleen Kahle, Kenneth Lehn, Michael Lemmon, Erik Lie, Gershon Mandelker, and an anonymous referee. I also thank Natasha Apollovna and Maura Dietz for their valuable research assistance


ABSTRACT

This study examines the allocation of cash proceeds following 400 subsidiary sales between 1990 and 1998. Retention probabilities are increasing in the divesting firm's contemporaneous growth opportunities and expected investment. Retaining firms, however, also systematically overinvest relative to an industry benchmark. Shareholder returns to retention decisions are positively correlated with growth opportunities and benchmarked investment, but negatively correlated with benchmarked investment for firms with poor growth opportunities. Shareholder returns to debt distributions are increasing in industry-benchmarked leverage. Overall, the results of this study cohere with the hypothesized trade-off between the investment efficiencies associated with retained proceeds and the agency costs of managerial discretion and debt.

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