Large Shareholders, the Board of Directors and the Allocation of Cash Proceeds from Corporate Asset Sell-offs

Ataullah, Ali; Davidson, Ian and Le, Hang (2010). Large Shareholders, the Board of Directors and the Allocation of Cash Proceeds from Corporate Asset Sell-offs. European Financial Management, 16(2) pp. 271–295.

DOI: https://doi.org/10.1111/j.1468-036X.2008.00447.x

Abstract

Recent finance literature suggests that managers of divesting firms may retain cash proceeds from corporate asset sell-offs in order to pursue their own objectives, and, therefore, shareholders' gains due to these deals are linked to a distribution of proceeds to shareholders or to debtholders. We add to this literature by examining the role of various corporate governance mechanisms in the context of the allocation of sell-off proceeds. Specifically, we examine the impact of directors' share-ownership and stock options, board composition and external large shareholdings on (1) shareholders' abnormal returns around asset sell-off announcements, and (2) managers' decision to either retain or distribute (to shareholders or to debtholders) sell-off proceeds. We find that non-executive directors' and CEO's share-ownership and stock options are related to shareholders' gains from sell-offs for firms that retain proceeds. However, corporate governance mechanisms are not significantly related to shareholders' gains for firms that distribute sell-off proceeds. Furthermore, we find that the likelihood of a distribution of proceeds, relative to the retention decision, is increasing in large institutional shareholdings, executive and non-executive directors' share-ownership and non-executive representation in the board.