Essays on Asset Purchases and Sales: Theory and Empirical Evidence

Title of dissertation: ESSAYS ON ASSET PURCHASES AND SALES: THEORY AND EMPIRICAL EVIDENCE Liu Yang, Doctor of Philosophy, 2006 Dissertation directed by: Dr. Vojislav Maksimovic Department of Finance This dissertation consists of a theory essay and an empirical essay that investigate a firm’s decision to buy or sell corporate assets. It seeks to answer the following research questions: (1) why do firms choose to buy or sell assets? (2) what makes assets in an industry more likely to be traded than assets in other industries? and (3) within an industry, why asset sales come in waves and tend to cluster over a certain time period? In my theory essay, “The Real Determinants of Asset Sales”, I develop a dynamic equilibrium model that jointly analyzes firms’ decisions to buy or sell assets and the activity of asset sales in the industry. In my model, a firm maximizes its value by making two inter-related decisions: how much to invest in new assets and whether to buy or sell existing assets. These decisions are made under both firmand industry-level productivity shocks. By modeling equilibrium asset prices, I am able to make predictions about an industry with a well-defined panel of firms. The model is solved through simulations and it is calibrated using the plant-level data from Longitudinal Research database. I show that most of the empirical evidence documented in the literature on asset sales is consistent with value-maximizing behavior. My model also provides testable implications for the cross-industry and timeseries variations in asset sales. In my empirical essay, “What Drives Asset Sales The Empirical Evidence”, I test the model’s predictions using the plant-level data from Longitudinal Research Database on manufacturing firms in the period of 1973 to 2000. The patterns of transactions (firm-level purchase/sale decisions, and the cross-industry and the time-series variation in asset sales activities) are consistent with my theoretical model. Specifically, I show that: (1) asset purchases are more likely when firms’ existing plants experience increases in productivity, and asset sales are more likely when firms have decreases in productivity (“rising buys falling”); (2) shock attributes such as persistence and dispersion help to explain the cross-industry variation in asset sales industries with less persistent and more widely dispersed productivity shocks, on average, have higher rates of assets sales; and (3) within an industry, periods with more uncertainty regarding firms’ relative productivity positions are associated with more frequent trades of existing assets. This essay is based on the ongoing joint work with Vojislav Maksimovic and Gordon Phillips. ESSAYS ON ASSET PURCHASES AND SALES: THEORY AND EMPIRICAL EVIDENCE