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

48 Pages Posted: 14 Mar 2010

See all articles by Lee Pinkowitz

Lee Pinkowitz

Georgetown University - Department of Finance

Jason Sturgess

Queen Mary University of London

Rohan Williamson

Georgetown University - McDonough School of Business

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Date Written: March 12, 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

Pinkowitz, Lee Foster and Sturgess, Jason and Williamson, Rohan G., Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions (March 12, 2010). Available at SSRN: https://ssrn.com/abstract=1569660 or http://dx.doi.org/10.2139/ssrn.1569660

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)

Jason Sturgess

Queen Mary University of London ( email )

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

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)

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