Why are Cash-Rich Firms More Likely to Pay for Acquisitions with Stock?
42 Pages Posted: 23 Aug 2010
There are 3 versions of this paper
Why are Cash-Rich Firms More Likely to Pay for Acquisitions with Stock?
Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions
Do Firms Set Free Cash Free? Misallocation vs. Opportunism in Acquisitions
Date Written: August 23, 2010
Abstract
We examine why cash-rich firms prefer to use stock to make acquisitions. Consistent with prior literature, we find that cash-rich firms are more likely to attempt acquisitions than other firms. However, cash-rich acquirers are more likely to employ 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. Finally, in the post-acquisition period, cash-rich firms that acquire with stock are at least as likely to maintain high levels of excess cash as non-bidder cash-rich firms.
Keywords: Cash holdings, method of payment, acquisitions
JEL Classification: G30, G31, G34
Suggested Citation: Suggested Citation
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