The Real Determinants of Asset Sales
58 Pages Posted: 18 Mar 2006
Date Written: September 2006
In this paper I develop a dynamic structural model in which a firm makes rational decisions to buy or sell assets in the presence of both idiosyncratic and aggregate productivity shocks. By identifying equilibrium asset prices, the model produces an industry with a well-defined panel of firms, and jointly analyzes firms' asset sales decisions and the aggregate asset sales activity in the business cycle. It suggests that changes of productivity, rather than levels, affect firms' decisions - firms with increasing productivity buy assets while firms with decreasing productivity choose to downsize. More assets are transacted in expansion years when aggregate productivity and price for existing assets are higher. The model is calibrated using the plant-level data from the U.S. Census Bureau's Longitudinal Research Database (LRD). Using the simulated panel, I show that most of the empirical evidence on asset sales is consistent with value-maximizing behavior: (1) firms which buy assets have higher valuation around the transaction, but lower long-run average - a result that was previously used to support the market-timing theory; (2) small acquirers have higher returns during the acquisition year than do large acquirers; and (3) dynamic properties of productivity shocks affect the asset sales activity in the industry: industries with less persistent and highly dispersed productivity shocks have greater asset sales.
Keywords: Asset Sales, Asset Purchases, Productivity shocks, Persistent
JEL Classification: G34 G31
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