Asset sales by financially distressed firms

https://doi.org/10.1016/0929-1199(94)90004-3Get rights and content

Abstract

This paper examines asset sales by financially distressed firms. Contrary to the results for healthy firms, we find significantly lower returns to shareholders when asset sales proceeds are used to repay debt than when sales proceeds are retained by the firm. We find that asset sales proceeds are more likely to be paid out to creditors, as opposed to being retained by the firm, the larger the proportion of short-term senior bank debt in the firm's capital structure and the poorer the selling firm's investment opportunities. Our results suggest that creditors significantly influence the liquidation decisions of financially distressed firms.

References (22)

  • R. Gertner et al.

    A theory of workouts and the effects of reorganization law

    Journal of Finance

    (1991)
  • Cited by (102)

    • Endogenous lemons markets and information cycles

      2022, Journal of Economic Dynamics and Control
    • Asset sales and subsequent acquisitions

      2018, International Review of Financial Analysis
      Citation Excerpt :

      Section 5 concludes the paper. Hite, Owers, and Rogers (1987) and Brown, James, and Mooradian (1994) propose that retaining the proceeds from selling assets increases the wealth of seller shareholders if the proceeds are reallocated to unfunded, but positive net present value (NPV) projects. According to Bates (2005), sale proceeds are retained based on the optimal level of cash holdings where the expected benefit of holding cash is simply offset by the expected cost.

    View all citing articles on Scopus
    1

    We are grateful for comments from Paul Asquith, Stuart Gilson, Mike Ryngaert, Jerry Warner and seminar participants at the 1991 Georgetown Bankruptcy Conference, the University of Houston, Texas A and M, Purdue, Arizona State and the 1994 American Finance Association meetings.

    View full text