61 Pages Posted: 25 Oct 2012 Last revised: 27 Nov 2014
Date Written: 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.
Keywords: Cash Holdings, Merger and Acquisitions, Share Repurchase, Agency
JEL Classification: G30, G32, G34, G35
Suggested Citation: Suggested Citation