What is the Magic in An Equity Deal? Theory and Evidence on the Means of Payment in Asset Sales

We develop a general asymmetric information model that explains the value- enhancing role of equity in asset sales, without having to specify a particular negotiation or sales procedure. We demonstrate that the identity of the informed party is crucial to explaining the positive effects of equity as a means of payment. When sellers (and not buyers) have the private information, equity-based transactions generate greater increases in aggregate wealth than cash sales. Buyers obtain a significant portion of combined gains because sellers need to send a credible signal. Empirical tests support that model's predictions and indicate that sellers have an informational advantage and are in a stronger bargaining position than buyers. Information: proosenboom@rsm.nl