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Internal vs. External Cash: Evidence on M&As and Share Repurchases

Igor Cunha

University of Kentucky

November 26, 2014

Large cash reserves have typically been associated with agency problems and poor investment decisions. I explore the cross sectional variation on the sources of cash holdings (internal vs. external to the firm) and find that previous evidence on overinvestment is mainly driven by firms that build their cash reserves using internal funds. Firms that use external funds do not engage in empire-building acquisitions that destroy shareholder value. I also find that these firms present higher announcement returns to their share repurchases in response to a signal they send to the market that they are no longer dependent on external capital.

Number of Pages in PDF File: 61

Keywords: Cash Holdings, Merger and Acquisitions, Share Repurchase, Agency

JEL Classification: G30, G32, G34, G35

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Date posted: October 25, 2012 ; Last revised: November 27, 2014

Suggested Citation

Cunha, Igor, Internal vs. External Cash: Evidence on M&As and Share Repurchases (November 26, 2014). Available at SSRN: https://ssrn.com/abstract=2167060 or http://dx.doi.org/10.2139/ssrn.2167060

Contact Information

Igor Cunha (Contact Author)
University of Kentucky ( email )
Gatton College of Business and Economics
550 S. Limestone
Lexington, KY 40526
United States
859-257-5703 (Phone)
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