Investigating the discount on trade sale transactions

Recent empirical evidence has highlighted differences between transactions involving the acquisition of listed and unlisted (private) targets. Acquirers of unlisted targets earn excess returns, a result different to transactions involving the purchase of listed targets This research focuses on one segment of the market for unlisted targets, namely the sale of subsidiaries by publicly listed companies. Officer (2007) finds that listed companies sell a segment of their business at an average 30% discount relative to transactions involving publicly listed targets. This discount is attributed to liquidity pressure on the selling company, prompting a fire sale. This result implies a significant transfer of value from seller to buyer and, if correct, suggests a significant friction in the efficient reallocation of assets within the economy. I explore the robustness of this conclusion by examining four issues. Firstly, measurement issues raised by the use of valuation multiples to estimate comparative value. We consider the impact of these issues on reported results. This has implications for the use of multiples in both academic and applied settings. Secondly, even if liquidity pressures are the cause, the transmission mechanism is not well understood. Thirdly, other explanations have not been explored. The most obvious alternative explanation is that companies are undertaking strategic transactions to remove underperforming businesses. Other potential explanations include the impact of agency costs, and mispricing arguments. Finally, the potential for self selection raises endogenity issues which may affect statistical conclusions. We address these issues using a sample of private and public market acquisitions from the United States.