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Easy Come, Easy Go: Free Cash and Bad Investment Decisions

Igor Cunha

Nova School of Business and Economics

May 12, 2014

I explore the information on the cash flow statement to separate cash that is internally generated (i.e., cash from operations) from the cash that is externally raised (i.e., cash from financing). Consistent with theories of the disciplinary effects of external financing, I find that the overspending evidence previously associated to all firms with large cash holdings is driven by firms with high cash reserves coming from operations. Firms that derive their cash holdings from financing activities are less likely to engage in empire-building acquisitions that destroy shareholder value. These firms also present higher returns to their share repurchases due to their commitment to reduce agency problems and their more conservative attitude toward cash management.

Number of Pages in PDF File: 58

Keywords: Cash Holdings, Merger and Acquisitions, Share Repurchase, Agency

JEL Classification: G30, G32, G34, G35

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Date posted: October 25, 2012 ; Last revised: May 13, 2014

Suggested Citation

Cunha, Igor, Easy Come, Easy Go: Free Cash and Bad Investment Decisions (May 12, 2014). Available at SSRN: http://ssrn.com/abstract=2167060 or http://dx.doi.org/10.2139/ssrn.2167060

Contact Information

Igor Cunha (Contact Author)
Nova School of Business and Economics ( email )
Faculdade de Economia da UNL (NOVASBE)
Campus de Campolide
Lisbon, 1099-032
+351 213801693 (Phone)
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References:  24
Footnotes:  5

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