Financing, fire sales, and the stockholder wealth effects of asset divestiture announcements

We examine the impact of financial distress conditions at the individual firm level, the operating industry level, and the overall economy on the market reaction to divestment announcements. This allows us to examine fire sale explanations, as distinct from financing explanations, of divestment announcements. We find stockholders suffer significant wealth losses when firms sell assets during periods of industry distress. During these periods the natural buyers of the divested assets are likely to also be financially constrained, and so selling firms receive a lower price (Shleifer and Vishny, 1992). We find some support for the financing explanation of the market response to divestments. However, industry distress dominates firm and economic distress in explaining the market response to divestments. Finally stockholder wealth losses during industry distress conditions increase with the relative size of the divested assets