Companies that sell parts of their businesses to raise money for upcoming acquisitions tend to secure better deals and stronger investor backing, according to recent research from the University of Surrey. The study, which appears in The Journal of Financial Research, shows that firms which divest major assets before purchasing another company are more likely to use cash to complete the deal. This matters because investors consistently respond more favourably to acquisitions funded by clear and deliberate cash sources than to those financed by debt, internal reserves, or new share issues. The findings suggest that how an acquisition is financed carries signals about management intentions and the quality of decision-making, which shareholders closely monitor.

The research analysed more than 21,000 acquisition announcements made by US companies between 1990 and 2019. This large dataset allowed the authors to study patterns that hold across different industries, economic cycles and market conditions. One striking result was that firms that had recently sold sizeable assets were 26 per cent more likely to complete a takeover entirely in cash than firms that did not sell first. These companies also enjoyed significantly more positive market reactions at the time of the announcement. On average, the increase in share price added $234 million in value to the typical firm that had sold assets before its acquisition. In other words, the market did not simply approve of the purchase itself, but seemed to reward the strategic preparation that enabled it.

A key explanation for this effect is how investors interpret the source of financing. Cash raised from selling an asset is seen as direct, transparent and purposeful. It indicates that the firm has taken time to evaluate what it owns, to decide what no longer contributes to its long-term direction, and to reallocate capital to where it can produce more value. By contrast, funding a takeover through debt can raise concerns about future financial strain, while issuing new shares can dilute existing shareholders’ stakes. Using internal reserves may also be viewed as stretching the company too thin. When the money comes from divestment, however, the funding appears cleaner and more disciplined, reassuring investors that management is acting with clear strategic priorities rather than with opportunism or pressure.

The study also addresses a significant misconception. Selling parts of a business can sometimes signal weakness or retrenchment, especially if a company appears to be shrinking its scope. However, in the context of preparing for a well-targeted acquisition, divestment is interpreted quite differently. Investors view this sequence of actions as evidence of careful planning. It signals that the company is pruning its portfolio to build a more coherent, valuable shape, rather than either unquestioningly expanding or clinging to legacy units that no longer fit. The sale is therefore not a retreat, but a step taken to clear space and free resources for stronger, more promising opportunities.

Dr Christos Mavrovitis, Senior Lecturer in Finance and Accounting at the University of Surrey and a co-author of the study, summarises the strategic message clearly. He argues that how companies finance acquisitions speaks volumes about their approach to growth. Selling assets to fund a purchase shows that management is prepared to make hard decisions to focus the organisation and strengthen its future performance. It demonstrates a willingness to let go of underperforming or strategically misplaced parts of the business to invest in areas with greater potential. This mindset, he suggests, is what the market recognises and rewards, because it reflects thoughtful stewardship rather than impulsive expansion.

Taken together, the findings reveal that the sequence of corporate actions surrounding an acquisition can shape investor reactions just as powerfully as the acquisition itself. Growth achieved through addition alone does not impress the market as much as growth undertaken with selective refinement in advance. When firms demonstrate that they are actively shaping their identity, focusing on what matters and redirecting resources towards opportunities that align with their goals, investors respond with trust and confidence. The uplift in shareholder value observed in the study is therefore not merely a financial coincidence, but a reflection of broader market approval for disciplined strategic thinking.

More information: Christos Mavrovitis et al, Selling to buy: Asset sales, acquisition financing,and value creation, The Journal of Financial Research. DOI: 10.1111/jfir.70002

Journal information: The Journal of Financial Research Provided by University of Surrey