Equity and Cash in Intercorporate Asset Sales: Theory and Evidence

We develop a two-sided asymmetric information model of asset sales that incorporates the key differences from mergers and allows the information held by each party to be impounded in the transaction. The buyer's information is conveyed through a first-stage competitive auction. A seller with unfavorable information about the asset accepts the cash offer of the highest bidder. A seller with favorable information proposes a take-it-or-leave-it counteroffer that entails buyer equity. Thus, the cash-equity decision reflects the seller's but not the buyer's information in contrast to the theoretical and empirical findings for mergers. The central prediction of our model is that there are large gains in wealth for both buyers and sellers in equity-based asset sales, whereas cash sales generate significantly smaller gains that typically accrue only to sellers. Our empirical results are consistent with the predictions of our theoretical model.