Asset sales can have opposing effects on firm credit quality. On the one hand asset sales could signal increased credit risk resulting from distress or on the other hand they could improve internal liquidity and hence credit quality. Therefore the impact potential asset sales can have on credit quality is an empirical question and one that has previously not been examined in the literature. The paper aims to discuss these issues.
Using credit ratings as a measure of firm credit quality, in ordered probit regressions, this study finds evidence consistent with the internal liquidity view of the asset sales-credit risk relationship.
Results from ordered probit regressions of credit ratings show that the likelihood of higher credit ratings is increasing in industry-level turnover of real assets
Credit-rating agencies often cite the impact of asset sales on firm credit quality as a motivation for their rating assignments. Distress-driven asset sales could reduce firm credit quality whereas other asset sales could result in increased internal firm liquidity and hence improve firm credit quality. This bi-directional expectation leaves the question of how asset sales affect credit quality to be answered empirically and has not been previously tested in the literature.
JEL Classifications — G24, G30, G34
This work was started when the author was at Texas A&M University-Corpus Christi. The opinions and results found in the present study are those of the author and do not represent the views of the Federal Reserve Bank of Cleveland or of the Federal Reserve System.
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