Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions
48 Pages Posted: 14 Mar 2010
Date Written: March 12, 2010
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: Suggested Citation