ASSET SALES, FIRM PERFORMANCE, AND THE AGENCY COSTS OF MANAGERIAL DISCRETION

We argue that management sells assets when doing so provides the cheap est funds to pursue its objectives rather than for operating efficienc y reasons alone. This hypothesis suggests that (1) firms selling asset s have high leverage and/or poor performance, (2) a successful asset s ale is good news, and (3) the stock market discounts asset sale procee ds retained by the selling firm. In support of this hypothesis, we fin d that the typical firm in our sample performs poorly before the sale and that the average stock-price reaction to asset sales is positive o nly when the proceeds are paid out.