The Real Determinants of Asset Sales

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 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’ investment decisions and the aggregate activity of asset sales over the business cycle. It suggests that changes of productivity, rather than levels, affect firms’ decisions firms with rising productivity buy assets and firms with falling productivity choose to downsize (rising buys falling). On the aggregate level, industries with less persistent and highly dispersed productivity shocks experience more changes in productivity and therefore have greater asset sales. I calibrate my model by matching the simulated moments with empirical moments using plantlevel data from 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; and (2) small acquirers have higher returns during the acquisition year than do large acquirers. JEL Classification: G31, G34