Cash Acquirers: Free Cash Flow, Shareholder Monitoring, and Shareholder Returns

Xfi Centre for Finance and Investment, University of Exeter, Discussion Paper No. 10/07

45 Pages Posted: 10 Jan 2011  

Alan Gregory

University of Exeter - Xfi Centre; University of Exeter Business School

Yuan-Hsin Wang

affiliation not provided to SSRN

Date Written: October 1, 2010

Abstract

Although Jensen (1988) argues that high levels of free cash flow and unused borrowing capacity are likely to encourage low-value mergers, the “pecking order” theory offers a different perspective, where managers conserve cash flow to undertake positive NPV investments. We argue that the stronger position of shareholders, as opposed to firm managers, in the UK compared to the US makes the Free Cash Flow (FCF) hypothesis less likely to be relevant in the UK. In support of this, by analysing both announcement period and long term returns, we show that for a comprehensive sample of UK cash acquirers there is little support for the Free Cash Flow (FCF) hypothesis. Instead, our evidence is consistent with greater shareholder monitoring mitigating any agency problem associated with high FCF. Our results are also consistent with low FCF firms having a greater likelihood of being financially distressed.

Keywords: Free Cash Flow, Shareholder Monitoring, Acquisitions

Suggested Citation

Gregory, Alan and Wang, Yuan-Hsin, Cash Acquirers: Free Cash Flow, Shareholder Monitoring, and Shareholder Returns (October 1, 2010). Xfi Centre for Finance and Investment, University of Exeter, Discussion Paper No. 10/07. Available at SSRN: https://ssrn.com/abstract=1736585 or http://dx.doi.org/10.2139/ssrn.1736585

Alan Gregory (Contact Author)

University of Exeter - Xfi Centre ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

University of Exeter Business School ( email )

Streatham Court
Xfi Building Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Yuan-Hsin Wang

affiliation not provided to SSRN ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
172
rank
158,038
Abstract Views
1,126
PlumX