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Methods of Payment in Asset Sales: Contracting with Equity versus Cash

Authors

  • MYRON B. SLOVIN,

  • MARIE E. SUSHKA,

  • JOHN A. POLONCHEK

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    • Slovin is at Louisiana State University and HEC School of Management, Paris. Sushka is at Arizona State University and HEC School of Management, Paris. Polonchek is at Oklahoma State University. We thank an anonymous referee for insightful comments and suggestions that substantially improved this paper, and Richard Green (the editor) for valuable guidance and insights.


ABSTRACT

We analyze intercorporate asset sales where equity is the means of payment, and compare the results to cash asset sales. Equity deals are value-enhancing for both buyers, 10%, and sellers, 3%, while cash sales generate seller returns of 1.9% and buyer returns that are not significant. Combined wealth gains are large for equity deals, but modest for cash deals. Equity-based asset sales are not a precursor to consolidations between buyers and sellers, and do not affect buyer openness to the takeover market. We conclude that the use of buyer equity conveys favorable information about the value of assets and buyers.

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