Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions

48 Pages Posted: 15 Mar 2010

See all articles by Jason Sturgess

Jason Sturgess

Queen Mary University of London

Lee Pinkowitz

Georgetown University - Department of Finance

Rohan Williamson

Georgetown University - McDonough School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: March 11, 2010

Abstract

We examine the impact of excess cash on the decision and method of payment in acquisitions. Consistent with prior literature, we find that firms that have excess cash do make more acquisitions. However, those acquisitions frequently use stock as the method of payment. We investigate this finding further and show that cash-rich firms use overvalued equity to make acquisitions. Moreover, there is no evidence that firms waste excess cash on acquisitions; cash-rich firms that pay with cash actually acquire undervalued firms. Our results suggest that with respect to acquisitions, managers are opportunistic with the firm’s financial resources; both its equity and its cash.

Keywords: Cash holdings, method of payment, acquisitions

JEL Classification: G30, G31, G34

Suggested Citation

Sturgess, Jason and Pinkowitz, Lee Foster and Williamson, Rohan G., Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions (March 11, 2010). Available at SSRN: https://ssrn.com/abstract=1569074 or http://dx.doi.org/10.2139/ssrn.1569074

Jason Sturgess

Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom

Lee Foster Pinkowitz

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-2689 (Phone)
202-687-4031 (Fax)

Rohan G. Williamson (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-2284 (Phone)
202-687-4031 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
54
rank
91,171
Abstract Views
630
PlumX Metrics