Cash Stockpiles and Investment: Do Cash-Rich Firms Use Cash in Acquisitions?

Abstract

U.S. firms are hoarding a $2 trillion cash stockpile which many believe will spur acquisition activity. In light of this fact, we examine whether cash-rich firms actually use their cash when making acquisitions. Surprisingly, we show that firms in the top third of cash holdings are 45% more likely to use stock versus cash in acquisitions, vis-à-vis other firms. Additionally, cash-rich firms both make fewer all-cash bids and use a lower proportion of cash in mixed bids. We investigate this phenomenon further and show that cash-rich firms are more likely to use equity as the method of payment when they are overvalued. Moreover, there is no evidence that cash rich firms waste their 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. Overall, the evidence implies that the link between cash stockpiles and cash acquisitions is not as obvious as commonly believed.

Keywords: Cash holdings, method of payment, acquisitions, market timing

JEL Classification: G34, G30, G32