The Market for Corporate Control and Corporate Cash Holdings

60 Pages Posted: 23 May 2000

See all articles by Lee Pinkowitz

Lee Pinkowitz

Georgetown University - Department of Finance

Date Written: January 24, 2000

Abstract

Conventional wisdom asserts that firms with large cash holdings are likely takeover targets. Using hostile takeover activity from 1985-1994, I find the probability a firm will be acquired decreases with cash. This holds for firms with excess cash as well as those with poor investment opportunities. Cash decreases acquisition probability by deterring potential bids, but does not increase premiums offered when bids occur. Finally, cash decreases after passage of antitakeover legislation. Thus, managers may hold cash to entrench themselves at shareholders' expense. Consequently, the market for corporate control does not monitor corporate cash holdings. Rather, cash may decrease such monitoring.

JEL Classification: G34

Suggested Citation

Pinkowitz, Lee Foster, The Market for Corporate Control and Corporate Cash Holdings (January 24, 2000). Available at SSRN: https://ssrn.com/abstract=215191 or http://dx.doi.org/10.2139/ssrn.215191

Lee Foster Pinkowitz (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
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202-687-4031 (Fax)

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