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Wealth effects for buyers and sellers of the same divested assets.

Neil W. Sicherman is an Associate Professor of Finance at the University of South Carolina, Columbia, South Carolina, and Richard H. Pettway is Missouri Bankers Chair Professor of Finance at the University of Missouri-Columbia, Columbia, Missouri.

* Self-offs are a unique part of the acquisitions market. The buying firm does not purchase the entire selling firm, but only a portion consisting of the divested assets or units. Further, the selling firm rather than the buying firm initiates the transaction and normally deals with only one buyer. Under such conditions, the market for divested assets may be less competitive than the broader market for corporate control.

Recent divestiture studies find that shareholders of selling firms earn abnormal gains at announcement.(1) These empirical results are consistent with recently offered management entrenchment and tax timing option hypotheses of selling-firm shareholder reactions to the announcements of sell-offs.(2) However, unlike other acquisitions, buyers of divested assets also earn positive abnormal returns.(3)

Previous studies measure the separate effects of purchases or sales of divested assets, not the effects on a matched set of buyers and sellers of the same assets. The purpose of this paper is to measure the wealth effects of both the buyers and sellers of the same divested assets to determine how these wealth gains are shared among buyers and sellers in a controlled sample. The results of this study indicate that both buyers and sellers earn positive abnormal returns at the announcement of a divestiture. These abnormal returns are affected by changes in the seller's financial condition and by disclosure of the transaction price.

I. Factors Which Impact the Allocation of Announcement Wealth Effects

In a frictionless market, sell-offs would occur if assets can be sold for a greater value than their worth as a going-concern. However, in an imperfect market, self-interested managers may be motivated to divest assets at a cost to shareholders. For example, managers may entrench by resisting hostile takeover attempts by selling so-called "crown jewels." Also, managers of distressed firms are motivated to sell assets to raise cash and avoid employment loss.(4)

The negotiating power of a divesting firm should affect the allocation of wealth changes between the buyer and the seller of divested assets. Of course, in a perfectly competitive environment negotiating power would be irrelevant. However, real assets trade in imperfect markets. Particularly in the divestiture market, sellers typically initiate the transaction and often do not seek competitive bids.(5)

Also, shareholders of the selling firms and managers of the buying firms have incomplete information about the true values of the units or divisions that are being divested. Uncertainty about the true values of the divested assets, to the outside shareholders of the divesting firms and to the buyers, may be resolved over time. However, at divestiture announcements, shareholders' reactions depend on their perception of whether a fair price has been paid (received) for the divested assets. Thus, the wealth effects resulting from sell-off announcements should be a function of shareholders' perceptions about the seller's negotiating position and the transaction price.

A. Impact of Changes in the Seller's Financial Condition

A decrease in expected cash flows increases the probability of default for a firm. The firm in a declining financial condition will find it more costly to raise cash externally through the capital markets than through a divestiture of assets or divisions. Thus, a firm may employ a sell-off to raise needed cash. Selling-firm shareholders may react positively at the announcement of these sell-offs because financial slack has increased (Myers and Majluf |12~) and the probability of default has been reduced.

However, the selling firm may lose negotiating power if the buyer is aware of the firm's change in financial condition. For example, the downgrading of a divesting firm's credit rating informs potential buyers of a weakening financial condition and places the selling firm in a negotiating disadvantage.(6) Financially weakened sellers may be forced to take a lower price for divested units than nonweakened sellers. Also, since managers have incentives to avoid financial distress, selling-firm shareholders may view skeptically sell-off announcements after the firm has been downgraded. If shareholders perceive the negotiating disadvantage or negatively perceive management's intention, abnormal returns at the sell-off announcement will be lower for downgraded firms than for firms that are not downgraded. The negotiating disadvantage should be reflected in the allocation of sell-off-announcement wealth effects between buyers and sellers.

B. Impact of Transaction Price Disclosure

Klein |6~ finds that the disclosure of transaction prices at sell-off announcements impacts selling-firm shareholders' wealth.(7) Specifically, she finds that abnormal returns for sellers are positive and significant if the transaction price paid for the divested unit is disclosed at the sell-off announcement, but not significantly different from zero if the price is not revealed.

Myers and Majluf |12~ suggest that selling assets-in-place for their intrinsic value, without impacting growth opportunities, mitigates the costs (underinvestment) associated with informational asymmetry between managers and outside investors. The selling of the assets-in-place reveals their true value and thereby eliminates the informational asymmetry. If only part of the assets are sold (e.g., a divestiture), the true value of a portion of the firm's assets may be revealed and thus reduce underinvestment.(8) However, if the transaction price is not disclosed, the true value of the divested assets is not revealed and informational asymmetry is not reduced. Therefore, Klein's results are consistent with the Myers-Majluf model.

TABULAR DATA OMITTED

Failure to disclose the transaction price also impacts the perceptions of buying-firm shareholders. Given incomplete information, failure to disclose all information leads the uninformed to rationally expect undisclosed information to be unfavorable (Milgrom |9~). Failure to reveal the transaction price paid for divested assets will lead to less favorable reactions from shareholders of buying firms and divesting firms than if the price is disclosed. Since divesting after a credit downgrade may be viewed unfavorably by selling-firm shareholders, the failure to disclose the transaction price for downgraded sellers should result in a less favorable reaction than other sell-offs.

II. Research Design and Data Description

Abnormal returns to selling-firm and buying-firm shareholders are measured using an event study methodology similar to that of Mikkelson and Partch |8~ over a test period from 30 days prior to the announcement to 15 days after the announcement. A 250-day period beginning 280 days prior to the sell-off announcement is used to estimate market model parameters. Cumulative abnormal returns (CARs) are calculated and standardized over several intervals. However, the two-day announcement interval is of primary concern since our hypotheses yield predictions for announcement effects.

The focus of this study is the sharing of wealth gains and losses between buying-firm shareholders and selling-firm shareholders. Differences in cumulative abnormal returns between buyers and sellers do not entirely measure the allocation of wealth changes resulting from a divestiture announcement. Therefore, dollar abnormal returns (DARs) are calculated as measures of abnormal wealth effects to buying-firm and divesting-firm shareholders. The dollar abnormal return is calculated as the product of the two-day cumulative abnormal return and the market value of equity prior to the test period for each firm in the sample. Two-day DARs are measured and reported since the objective is to analyze the announcement impact.

This study begins with all completed voluntary sell-offs reported in Mergers and Acquisitions between 1981 and 1987. Divestiture of financial services are excluded due to the presence of a regulatory environment. To be included, buying firms and divesting firms must be listed on the NYSE/AMEX daily stock return files of the Center for Research in Security Prices (CRSP) over the estimation period and test period and be actively traded during the study period. All sell-off announcements were reported in the Wall Street Journal. The date the announcement appears in the Wall Street Journal is defined as AD or day zero. Divesting firms with other news reported (e.g., mergers, dividend announcements, earnings announcements) on the announcement date, the day before the announcement, or the day after the announcement are eliminated from the sample. The final test sample includes 278 sell-offs with matched buyers and sellers.

Reported in Exhibit 1 is the distribution of 278 matched pairs of sell-off announcements completed from 1981 to 1987. There are 77 selling firms that had nonreversed credit downgrades by Moody's and/or Standard & Poor's within two years prior to the announcement of the divestiture. Transaction prices were disclosed at the sell-off announcement for 145 divestitures. Most announcements occurred in 1986 (61). Announcements in each category are relatively evenly dispersed over time.

Additional descriptive data are presented in Exhibit 2. The sample is dichotomized on the basis of prior downgrades of the divesting firm's credit rating and transaction price disclosure at announcement. Downgraded sellers disclosed the transaction price in 44 cases and non-downgraded sellers revealed the price in 101 announcements. The mean sell-off price is $189.0 million for those reported, and this represents an average 30.15% of the seller's equity value prior to the sell-off.(9)

TABULAR DATA OMITTED

The mean transaction value is $268.6 million if the seller had been downgraded and $154.6 million if the seller had not been downgraded. The difference between these mean transactions values is significant with a t-value of 2.56. The relative size of the sell-off is actually smaller for downgraded sellers than for nondowngraded sellers. Transaction values average 27.18% of the seller's equity value if the divesting firm had been downgraded and 31.43% if not. However, these values are not statistically different (t = -0.40).(10) The market value of the buying-firm's equity averages 7.38 times the divesting-firm's equity market value. This ratio averages 5.09 if the sellers had been downgraded and 8.26 if the sellers had not been downgraded. The difference between the relative size for the 77 downgraded sellers and 201 nondowngraded sellers is not statistically different at conventional levels (t = -1.38).

III. Results

A. Full Sample of Buyers and Sellers

The cumulative abnormal returns (CARs) for the 278 matched buyers and sellers of divested assets are presented in Exhibit 3. Selling-firm CARs over selected intervals around the sell-off announcement date (AD) are shown in Panel A. The two-day announcement CAR for this sample of divesting firms is 0.92% and significant (Z = 6.33). This result is consistent with the predictions of Myers and Majluf |12~, Shleifer and Vishny |14~, and Mauer and Lewellen |7~. The positive reaction by selling-firm shareholders to the announcement of a sell-off is also consistent with previous findings reported in the literature.(11)
Exhibit 3. Cumulative Abnormal Returns (CARs) for 278 Sell-Offs
Completed During the Period 1981-1987 (in Percent)
Panel A. Sellers
Interval Around AD CAR Z-Value
-30 to -2 1.67 2.02(**)
-10 to -2 0.94 2.37(**)
-1 to 0 (AD) 0.92 6.33(*)
-10 to +10 1.54 3.20(*)
-30 to +15 2.77 3.40(*)
+1 to +15 0.18 1.15
Panel B. Buyers
Interval Around AD CAR Z-Value
-30 to -2 0.26 0.59
-10 to -2 -0.37 -1.39
-1 to 0(AD) 0.50 2.45(**)
-10 to +10 0.71 1.23
-30 to +15 1.57 2.11(**)
+1 to +15 0.89 2.19(**)
Notes:
* Significant at the 0.01 level.
** Significant at the 0.05 level.


Mixed results for preannouncement intervals are found in previous studies. For our sample, the CARs for sellers are significant for intervals prior to the announcement. However, only the CARs for nondowngraded sellers are significant over the preannouncement periods.(12) Buying-firm CARs for intervals around the announcement date are shown in Panel B of Exhibit 3. The two-day CAR at announcement for buying-firm shareholders is 0.50% and significant (Z = 2.45). This result is consistent with the findings reported in other studies (e.g., Rosenfeld |13~, and Sicherman and Pettway |15~).

The purpose of this study is to analyze the sharing of gains and losses between matched pairs of buyers and sellers of divested assets. A simple comparison of buyer CARs and seller CARs does not completely meet this objective. To measure the sharing of wealth gains and losses between buyers and sellers of divested assets, two-day announcement effect dollar abnormal returns (DARs) are calculated.

The DARs for the full sample of buyers and sellers are shown in Exhibit 4. On average, both buyers and sellers of divested assets increase shareholder wealth measured in dollar terms. Divesting firms increase equity market value by an average of $13,250,408 and buyers of divested assets increase equity market value by an average of $10,957,287. In this sample of sell-offs, combined shareholder wealth is increased by an average of $24,207,695.

B. Impact of Price Disclosure and Seller Financial Condition

Our first hypothesis is that abnormal returns from buying and selling divested assets and the allocation of gains and losses between buyers and sellers depend on changes in the financial condition or the negotiating position of the divesting firm. Our second hypothesis is that the abnormal wealth effect from buying and selling divested assets and the sharing of these abnormal returns also depends on the decision to disclose the transaction price at the divestiture announcement. Two-day CARs are calculated to analyze the abnormal wealth effects to buyers and sellers of divested assets and to examine the impact of seller credit downgrades and transaction price disclosure. Dollar abnormal returns are calculated to analyze the allocation of gains and losses between matched pairs of buyers and sellers of the divested assets.

Two-day announcement cumulative abnormal returns for several subsamples of buyers and sellers of divested assets are presented in the four panels of Exhibit 5. The CARs reported in Panel A indicate that both buyers and sellers gain at the announcements of sell-offs. Also, the percentage of positive two-day CARs within each classification is provided. They are generally consistent with average results.

A credit downgrade prior to a sell-off announcement may weaken the bargaining position of the divesting firm. Seventy-seven sellers had a nonreversed credit downgrade within two years prior to the sell-off announcement and 201 divesting firms were not downgraded at the time of the sell-off announcement.(13) Announcement CARs, if the seller has been downgraded, are presented in Panel B of Exhibit 5 for sellers and buyers. The two-day CAR for the group of 77 downgraded sellers is 0.37% and marginally significant (Z = 1.69). The two-day CAR for the group of 201 divesting firms that did not have prior downgrades is 1.13% and highly significant (Z = 6.40); and is significantly higher than the downgraded group (0.76%, Z = 1.92).(14) Buying-firm cumulative abnormal returns are positive and marginally significant, independent of divesting-firm downgrades.
Exhibit 4. Two-Day Announcement Dollar Abnormal Returns (DARs)
for Buyers and Sellers of the Same Divested Assets From
1981-197 (in Dollars)
Group DARs(*)
(1) Divesting-firm shareholders $13,250,408
(2) Buying-firm shareholders 10,957,287
(3) Total wealth gain (1) + (2) $24,207,695
Notes:
* Dollar abnormal returns (DARs) are measured as the product of
the two-day cumulative abnormal return (CAR) and the market
value of equity prior to the test period for each firm.


The disclosure of transaction price at the announcement of a sell-off reduces informational asymmetry about the assets of the selling firm. Also, the failure to disclose the price may convey unfavorable information to the outside shareholders of the buying firm and the divesting firm. Cumulative abnormal returns for buyers and sellers of divested assets for the 145 sell-off announcements when the transaction prices were disclosed and for the 133 announcements when the prices were not disclosed are presented in Panel C of Exhibit 5.

TABULAR DATA OMITTED

The CAR for the group of sellers when the transaction prices were disclosed at the sell-off announcement is 1.48% and highly significant (Z = 6.96). For the 133 sellers when prices were not reported, the CAR is 0.31% and marginally significant at traditional levels (Z = 1.88). The difference between these two groups is a significant 1.17% (Z = 3.44). The lack of price disclosure also impacts the buying-firm shareholders' reactions to divestitures. The buyer CAR is highly significant (0.82%, Z = 2.94) when the transaction prices are disclosed, and is not significantly different from zero (0.15%, Z = 0.46) when the prices are not revealed. The difference between these two subsamples is 0.67% (Z = 1.70). These results suggest that buying-firm shareholders and selling-firm shareholders react more favorably to sell-off announcements if the transaction prices are revealed. This is consistent with inferences made by Myers and Majluf |12~ and Milgrom |9~.

The impacts of the joint classifications of financial condition and price disclosure on the matched sellers and buyers are found in Panel D of Exhibit 5. Downgraded sellers that do not disclose transaction prices at sell-off announcements should be met with the least favorable shareholder reaction of all groups. The CAR for the sample of 33 divesting firms that were downgraded and did not reveal the transaction prices at announcement is only 0.13% and is the only group of sellers with a two-day CAR that is not significant (Z = 0.32). Conversely, the CAR for the group of 101 divesting firms that were not downgraded prior to the sell-off announcement and disclosed the transaction prices at the announcements is 1.89% and highly significant (Z = 7.04). The difference between these two groups of CARs is 1.76% and is significant (Z = 3.20).

The two-day CAR for the 33 downgraded sellers that did not disclose the transaction prices is not significantly different from the CAR for the 100 nondowngraded sellers that did not disclose the prices or from the 44 downgraded sellers that disclosed the prices. The CAR for the 101 sellers that disclosed the prices and were not downgraded is significantly higher than the 0.54% CAR for the group of 44 sellers that revealed the prices and were downgraded and the 0.36% CAR for the group of 100 divesting firms that did not reveal the prices and were not downgraded. These results suggest that the difference in two-day CARs is attributable to the joint effect of seller downgrades and the decision to disclose transaction prices.

Buyers earn positive CARs, if transaction prices are reported at announcements, regardless of whether or not the sellers have been downgraded. However, the buying-firm CARs, if the prices are not disclosed, are not significantly different from zero. The two-day CAR for the 101 buyers from nondowngraded sellers when the prices are disclosed is significantly higher than the two-day CAR for the 100 buyers from nondowngraded sellers when prices are not disclosed (Z = 1.69). The CAR for the 44 buyers from downgraded sellers when the prices are disclosed is also significantly higher than the 100 buyers from nondowngraded sellers when the prices are not disclosed (Z = 1.62).

These results suggest that the disclosure of transaction price at the sell-off announcement and changes in the financial condition of the seller are important in determining shareholders' reactions to the buying and selling of divested assets. However, the cumulative abnormal returns may not completely measure the impact of these variables on the allocation of gains and losses between the buyers and sellers of divested assets. In the following section, dollar abnormal returns for matched groups of buyers and sellers are calculated.

C. Allocation of Gains and Losses for Matched Groups of Buyers and Sellers

Presented in Exhibit 6 are the dollar abnormal returns for the sellers and buyers of divested assets for the full sample and for subsamples classified by seller downgrades and by transaction price disclosures. These categories provide some inference about the allocation of gains and losses between buyers and sellers and about the wealth created (or lost) by divestiture.

As suggested by calculations of cumulative abnormal returns (see Exhibit 3) and dollar abnormal returns, sell-off announcements are usually equity-value-increasing events for divesting firms and for buying firms. However, the DARs presented in Panel B indicate that buyers gain more wealth than sellers (almost double) when purchasing divested assets from downgraded sellers.

The average dollar abnormal return for buying firms is greater when purchasing divested assets from downgraded firms than from purchasing divested assets from nondowngraded sellers. On the other hand, sellers appear to gain more wealth when they sell divested assets after being downgraded. This result is consistent with Myers and Majluf |12~. The sale of assets by financially distressed firms increases slack and thereby increases the value of the firm.

Dollar abnormal returns are positive for both buyers and sellers of divested assets when transaction prices are disclosed. In contrast, the failure to disclose transaction prices has a dramatic impact upon the allocation of shareholders' wealth between buyers and sellers. The DAR for the buying firm is negative (-$11,094,282).(15) That is, the buyers actually lose wealth when the transaction prices are not announced. The divesting firms gain wealth even if the prices are not disclosed.

Further insight about the effect of seller downgrades and transaction price disclosures is gained by examining the joint impact of these two variables. Four groups of matched pairs of buyers and sellers are formed on the basis of seller downgrades and transaction price disclosures. The transaction prices were revealed in 44 divestiture announcements by downgraded sellers. Dollar abnormal returns are positive for both buyers and sellers for this group. Buyer DARs also exceed seller DARs for the 101 sell-off announcements by nondowngraded sellers that disclosed transaction prices.

TABULAR DATA OMITTED

Conversely, sellers gain more than buyers for the 100 announcements by nondowngraded sellers that did not reveal the transaction prices. Buyer DARs are negative for both groups of announcements that do not disclose transaction prices. The only negative seller DAR is for the group of 33 announcements by downgraded sellers that did not reveal the transaction prices.

In summary, there are many similarities between the impacts found in the CAR analysis in Exhibit 5 and the DAR analysis in Exhibit 6. Both analyses find that the buyers and the sellers gain wealth from divestitures. The buyers gain the most wealth when the transaction price is disclosed. Sellers gain the most wealth when they have not been downgraded and when the price is disclosed. Thus, the results from both analyses employed indicate similar impacts upon stockholder's wealth from divestiture.

D. Cross-Sectional Analysis of Cumulative Abnormal Returns

The analysis of cumulative abnormal returns of matched pairs of sell-offs indicates that credit downgrades and transaction price disclosure affect the shareholders' wealth of firms that buy divested assets and of firms that divest. To estimate the relation between the buyers' cumulative abnormal returns and seller downgrades and transaction price disclosures, the following cross-sectional model is estimated:

|CARBUYR.sub.i~ = ||alpha~.sub.0~ + ||alpha~.sub.1~ PRICE + ||alpha~.sub.2~ DOWNGRADE + ||alpha~.sub.3~ INTERACTION + |e.sub.i~. (1)

The dependent variable |CARBUYR.sub.1~ is the two-day announcement CAR for each buying firm. PRICE is an indicator variable coded one if the sell-off's transaction price was disclosed at announcement, and zero otherwise. DOWNGRADE is equal to one if the divesting firm has been downgraded prior to the sell-off announcement, and zero otherwise. Finally, INTERACTION is the product of PRICE and DOWNGRADE and should capture the joint effect of downgraded sellers and transaction price disclosure.

The regression estimates for this model are presented in Part A of Exhibit 7. Due to collinearity between the variables PRICE and DOWNGRADE and the variable INTERACTION, the interactive term is estimated separately. The coefficient on PRICE (||alpha~.sub.1~) is estimated to be 0.007 and significant (t = 1.55). This result suggests that TABULAR DATA OMITTED buying-firm shareholders earn greater cumulative abnormal returns if sell-off transaction prices are disclosed than if the prices are not revealed. The estimated coefficient for DOWNGRADE (||alpha~.sub.2~) is 0.000 and not significant (t = 0.08) suggesting that buyer wealth effects are independent of seller downgrades. The estimated coefficient on INTERACTION (||alpha~.sub.3~) is 0.004 and not significant.

The relation between selling-firm CARs and seller downgrades and transaction price disclosure is estimated by the following model:

|CARSELLR.sub.i~ = ||alpha~.sub.0~ + ||alpha~.sub.1~ PRICE + ||alpha~.sub.2~ DOWNGRADE + ||alpha~.sub.3~ INTERACTION + |e.sub.i~. (2)

The dependent variable |CARSELLR.sub.i~ is the two-day announcement CAR for each selling firm. The independent variables are defined the same as in Equation (1).

The results of the model estimation are presented in Part B of Exhibit 7. The estimated coefficient on PRICE (||alpha~.sub.1~) is 0.012 and significant (t = 2.29), indicating that divesting firms earn greater cumulative abnormal returns from sell-off announcements if the transaction prices are disclosed than if the prices are not reported. The coefficient on DOWNGRADE (||alpha~.sub.2~) is estimated to be -0.008 and marginally significant (t = -1.42). It can be inferred from this result that selling firms gain more wealth at sell-off announcements if they have not been downgraded prior to the sell-off. The coefficient on INTERACTION (||alpha~.sub.3~) is -0.004 and not significant (t = -0.60).(16)

IV. Summary

The impacts of divesting-firm credit downgrades prior to divestiture and the impacts of transaction price disclosure on the shareholder wealth of buyers and sellers of the same divested assets are examined. Also, dollar abnormal returns for matched pairs of buyers and sellers of the same divested assets are analyzed to gain inference about the sharing of abnormal wealth effects.

Consistent with previous studies, we find that the average two-day announcement cumulative abnormal return is positive for buyers and sellers of divested assets. The two-day announcement CARs are greater for selling firms that did not have credit downgrades during the two years prior to announcing sell-offs than the selling firms that had downgrades. CARs are higher for sellers of divested assets if transaction prices are disclosed than if the prices are not disclosed. In fact, the only subsample of divesting firms that does not have a positive and significant CAR is the group of firms that were downgraded and transaction prices were not disclosed.

Buying-firm CARs are positive and significant when buying from downgraded sellers and when buying from nondowngraded sellers. The CARs for these two groups are not significantly different. However, cumulative abnormal returns for firms buying divested assets are positive and significant if transaction prices are disclosed on the announcements. If transaction prices are not revealed, buying-firm CARs are not significantly different from zero.

Dollar abnormal returns are measured to compare wealth effects between matched pairs of buyers and sellers of divested assets. Both buyers and sellers of the same divested assets gain wealth from the transaction. We find that the sellers gain most when they have not been downgraded and when the price is disclosed. Buyers gain when the transaction price is disclosed. These results are consistent with the analysis of cumulative abnormal returns.

A cross-sectional regression reveals that both buyers and sellers gain significant wealth when the price of the transaction is announced. Further, the impact of the seller being downgraded prior to the sale is not significant for buyers, but is significant for sellers as they lose wealth at announcement if they had been downgraded prior to the sale.

The authors gratefully acknowledge comments from James Ang, the editor, two anonymous referees, Steve Mann, Ted Moore, and Rod Roenfeldt.

1 See Alexander, Benson, and Kampmeyer |1~, Rosenfeld |13~, Jain |5~, Klein |6~, Hite, Owers, and Rogers |4~, Tehranian, Travlos, and Waegelein |16~, and Hirschey and Zaima |3~.

2 Shleifer and Vishny |14~ suggest that entrenching managers will pay more for a divested asset than the asset's value, and Mauer and Lewellen |7~ argue that there is an increase in the tax timing option value associated with a divestiture.

3 See Rosenfeld |13~ and Sicherman and Pettway |15~.

4 Gilson |2~ finds that the turnover rate of managers of firms which default or renegotiate claims under distress exceeds the rate for managers of distressed firms which do not default. Thus, managers are motivated to raise needed cash by selling assets and thereby avoiding default. Any negative change in a firm's financial condition may precipitate divestiture simply because the manager's personal cost of default is very high.

5 In our sample, there are no cases of competitive bids being announced publicly; Jain |5~ finds the same phenomenon.

6 We do not argue that firms must be in financial distress to lose bargaining power. A credit downgrade provides information to potential bidders that the firm's financial condition has negatively changed.

7 Klein does not analyze the impact of price disclosure on buyers of divested assets.

8 A similar argument for isolating portions of the firm's assets through the formation of master limited partnerships is made by Moore, Christensen, and Roenfeldt |10~.

9 Wall Street Journal staff stated that the transaction price is reported if it is disclosed by either the buyer or the seller or if an estimate of the price is available from other sources.

10 A Mann-Whitney test is performed to determine if the median relative sizes are different for downgraded sellers than for nondowngraded sellers. The result fails to reject the null hypothesis that the medians are different (Z = 0.15).

11 For example, Alexander, Benson, and Kampmeyer |1~, Rosenfeld |13~, Jain |5~, Klein |6~, Hite, Owers, and Rogers |4~, and Hirschey and Zaima |3~ find positive selling-firm shareholder wealth effects at the announcements of sell-offs.

12 The CAR over the interval -30 to -2 is 2.05% and significant (Z = 2.08) and the CAR from -10 to -2 is 1.30% and significant (Z = 2.42) for divesting firms that have not been downgraded. Conversely, for downgraded sellers, the CAR over the period from -30 to -2 is 0.65% (Z = 0.47) and the CAR from -10 to -2 is 0.02% (Z = 0.60). These results suggest that news during the preannouncement period is less favorable for downgraded sellers than for nondowngraded sellers.

13 Few firms' downgrades suggest severe financial distress. However, the change in rating suggests a declining financial condition and a sell-off may be perceived as a response to the weakening position. All credit downgrade announcements occur prior to the test period and thus, any impact on share price resulting from the downgrade is assumed to have occurred prior to the sell-off announcement.

14 It may be the case that many of the most distressed firms (the firms in the worst negotiating position) were not able to sell assets to raise cash. By analyzing firms which have completed sell-offs, we may have sellers with weakened negotiating power but still able to sell assets at positive net present values. As shown, the CAR for this group is positive but significantly less than nondowngraded sellers.

15 dollar abnormal return for a subsample can be negative even if the cumulative abnormal return of that group is positive. This suggests that the larger firms in this subsample had negative CARs.

16 To test the impact of these variables on dollar abnormal returns, the two regression models were also estimated with the dependent variables defined as the product of the natural log of each firm's equity market value prior to the sell-off announcement and that firm's two-day CAR values. The results are similar to our cross-sectional analysis of CARs presented in Exhibit 7.

References

1. G. Alexander, G. Benson, and J. Kampmeyer, "Investigating the Valuation Effects of Announcement of Voluntary Divestitures," Journal of Finance (June 1984), pp. 503-517.

2. S. Gilson, "Management Turnover and Financial Distress," Journal of Financial Economics (December 1989), pp. 241-262.

3. M. Hirschey and J. Zaima, "Insider Trading, Ownership Structure, and the Market Assessment of Corporate Sell-offs," Journal of Finance (September 1989), pp. 971-980.

4. G.L. Hite, J.E. Owers, and R.C. Rogers, "The Market for Interfirm Assets Sales: Partial Sell-offs and Total Liquidations," Journal of Financial Economics (June 1987), pp. 229-252.

5. P.C. Jain, "The Effect of Voluntary Sell-off Announcements on Shareholder Wealth," Journal of Finance (March 1985), pp. 209-224.

6. A. Klein, "The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects," Journal of Finance (July 1986), pp. 685-696.

7. D. Mauer and W. Lewellen, "Security Holder Taxes and Corporate Restructuring," Journal of Financial and Quantitative Analysis (September 1990), pp. 341-360.

8. W.H. Mikkelson and M.M. Partch, "Withdrawn Security Offerings," Journal of Financial and Quantitative Analysis (June 1988), pp. 119-133.

9. P. Milgrom, "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics (Autumn 1981), pp. 380-391.

10. W. Moore, D. Christensen, and R. Roenfeldt, "Equity Valuation Effects of Forming Master Limited Partnerships," Journal of Financial Economics (September 1989), pp. 107-124.

11. S.C. Myers, "The Capital Structure Puzzle," Journal of Finance (July 1984), pp. 575-592.

12. S.C. Myers and N.S. Majluf, "Corporate Financing and Investment Decisions When Firms Have Information the Investors Do Not Have," Journal of Financial Economics (June 1984), pp. 187-221.

13. J.D. Rosenfeld, "Additional Evidence on the Relation Between Divestiture Announcements and Shareholder Wealth," Journal of Finance (December 1984), pp. 1437-1448.

14. A. Shleifer and R. Vishny, "Management Entrenchment: The Case of Manager-Specific Investments," Journal of Financial Economics (November 1989), pp. 123-139.

15. N.W. Sicherman and R.H. Pettway, "Acquisitions of Divested Assets and Shareholders' Wealth," Journal of Finance (December 1987), pp. 1261-1273.

16. H. Tehranian, N. Travlos, and J. Waegelein, "The Effect of Long-Term Performance Plans on Corporate Sell-off-Induced Abnormal Returns," Journal of Finance (September 1987), pp. 933-942.
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Title Annotation:Market Microstructure and Corporate Finance Special Issue
Author:Sicherman, Neil W.; Pettway, Richard H.
Publication:Financial Management
Date:Dec 22, 1992
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Is the market microstructure of stock markets important?

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