Why are Cash-Rich Firms More Likely to Pay for Acquisitions with Stock?

42 Pages Posted: 23 Aug 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

Multiple version iconThere are 3 versions of this paper

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

Pinkowitz, Lee Foster and Sturgess, Jason and Williamson, Rohan G., Why are Cash-Rich Firms More Likely to Pay for Acquisitions with Stock? (August 23, 2010). Available at SSRN: https://ssrn.com/abstract=1664051 or http://dx.doi.org/10.2139/ssrn.1664051

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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