There has been a major restructuring of corporate assets over the past decade in America. Some of the most notable restructuring activity includes mergers of whole firms. However, much restructuring involves the selling and/or buying of units, divisions, and selected assets of firms. These types of nonmerger restructuring of divisions and assets are called sell-offs and/or divestitures and are the focus of this study. Sell-offs typically occur to strategically realign the firms' assets and streamline operations or to raise capital for firms in financial difficulty or close to financial distress. Moreover, the sales of divisions or divested assets are often made without competitive bids from more than one firm. Often die price of the transaction is not made public at the announcement of die divestiture. There have been other studies that have measured the wealth impacts of divestitures on the buyers and sellers separately, but 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 of matched pairs. Additionally, our analysis measures the wealth impacts of two major factors that may affect how shareholders react to sell-off announcements. The first factor analyzed is the change in the financial condition of the selling firm. Firms in declining financial condition (i.e., decreases in expected cash flows) will find it more expensive to raise cash through the capital markets and may employ a sell-off to raise the needed cash. The divesting firm may lose negotiating power if a credit downgrade informs potential buyers of dhe seller's weakened financial condition. Our results indicate that downgraded divesting firms experience significantly lower share price increases than divesting firms that have not been downgraded. Downgraded sellers experience average abnormal price increases of 0.37% and nondowngraded sellers have average abnormal price increases of 1. 1 3% at sell-off announcements. We also find that credit downgrades for sellers do not explain share price changes for firms that buy divested assets. The second factor analyzed is the failure to publicly disclose the transaction prices paid for the divested assets. Stockholders' wealth responses to sell-off announcements will be conditioned on their perception of whether a fair price was paid (received) for the divested assets. Our research finds that divesting firms experience greater share price increases if the transaction price is disclosed. Abnormal share price increases average 1.48% for sellers that disclose transaction prices and just 0.3 1% for sellers who do not disclose transaction prices. Moreover, we find that buying firms' share price increases significantly only if the transaction Price is disclosed. Given that divesting-firm credit downgrades and transaction price disclosures influence share price changes at sell-off announcements, we examine the joint effect of these two factors on our matched set of buyers and sellers of the same divested assets. Downgraded sellers that do not disclose transaction prices should be met with the least favorable shareholder reaction at the announcements of sell-offs. This group is the only group of divesting firms in our sample that does not experience statistically significant share price increases (the average abnormal return is 0.13%) at sell-off announcements. Nondowngraded divesting firms that reveal the transaction prices average abnormal price increases of 1.89%. Firms buying divested assets from downgraded sellers and nondowngraded sellers experience significant share price increases only if the transaction prices are disclosed. Our sample includes 278 matched pairs of buyers and sellers of the same divested assets. The sample period is 1981 to 1987. Seventy-seven divesting firms had credit downgrades prior to announcing the divestiture. The transaction prices were not disclosed at the announcement in 133 of the transactions in our sample. The average transaction price paid for the divested assets is $189 million. Downgraded sellers sold assets averaging $269 million and nondowngraded sellers sold assets averaging $155 million. However, the value of the divested assets relative to the value of the divesting firm's equity is smaller for downgraded sellers than for nondowngraded sellers. Buyers of divested assets average equity market values 7.38 times the equity market value of the divesting firms. In summary, this paper measures the wealth impacts of sell-offs and the allocation of wealth between the buyers and sellers of the same divested assets. Several interesting findings are reported. Both buyers and sellers of the same divested assets gain wealth at announcement, on average. Buying firms gain die 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, these results suggest that shareholders of divesting firms and shareholders of firms that acquire divested assets can both gain from restructuring. However, results from strategic sell-offs may differ from divestitures induced by impending financial distress. Also, the full disclosure of the terms of the transaction may play an important role in determining how shareholders will react to the news of restructuring.
