This paper shows that investment banks that advise acquirers of assets negotiate favourable terms when they invest their own money in the deal, but lead their clients to overpay when they do not have financial incentives. Acquirers pay the smallest premiums in divisional MBOs when advised by the investment bank that finances the deal, and the largest premiums in interfirm asset sales when advised by an investment bank remunerated contingent on deal completion. Premiums are in between the two extremes when acquirers do not use advisors. These results are attributed to investment bank incentives, which exacerbate the information asymmetry between buyers and sellers of assets.

Previous research on asset sales has emphasized the divestment motivation and the use of the proceeds from the sale as determinants of selling firm value gains. In contrast, this paper explores the extent to which the relevant information necessary to evaluate sell-offs is embodied in the profitability of the sale, i.e. the price received by the seller over the value-in-use of the divested assets, where the latter is a function of past operating earnings and book value. Our empirical results show that sell-off profitability is substantially more significant in explaining the market reaction to divestiture announcements than the previous literature has suggested. We provide strong evidence of a positive relation between selling firm abnormal returns during sell-off announcements and profit on the sale, which remains significant after controlling for the motivation behind the sell-off, the use of the proceeds from the sale and the presence of agency costs of managerial discretion. We conclude that sell-off profitability explains a major portion of selling firm abnormal returns and is one of the most significant determinants of the market reaction to divestiture announcements.

We examine a sample of 254 related party and arms’ length acquisitions and sales of assets in Hong Kong during 1998–2000. Our analysis shows that publicly listed firms enter deals with related parties at unfavourable prices compared to similar arms’ length deals. Firms acquire assets from related parties by paying a higher price compared to similar arms’ length deals. In contrast, when they sell assets to related parties, they receive a lower price than in similar arms’ length deals. With the exception of audit committees, corporate governance characteristics have limited impact on transaction prices. Firms with audit committees on their boards pay lower prices to related parties for acquisitions and receive higher prices from related parties from divestments.