Internal vs External Financing of Acquisitions: Do Managers Squander Retained Profits?

Posted: 2 Oct 2000

See all articles by Euclid Tsakalotos

Euclid Tsakalotos

Athens University of Economics and Business

Andrew P. Dickerson

University of Warwick - Institute for Employment Research (IER)

Heather D. Gibson

Bank of Greece; Athens University of Economics and Business

Abstract

It is often argued that managers who have control over investment finance are more likely to pursue their own goals while those who have to raise funds externally are effectively monitored by the financial markets. One implication is that externally finances investment should be more profitable than internally financed investment. We focus on investment in acquisitions and show that its negative net impact on profitability (as seen in previous studies) derives from externally, rather than internally, financed acquisitions. Our results therefore do not support the hypothesis that managers squander internal funds on poor investment projects. Indeed, the evidence suggests that capital markets and financial institutions do not appear to generate the anticipated beneficial effects.

Suggested Citation

Tsakalotos, Euclid and Dickerson, Andrew P. and Gibson, Heather D., Internal vs External Financing of Acquisitions: Do Managers Squander Retained Profits?. Available at SSRN: https://ssrn.com/abstract=239253

Euclid Tsakalotos (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

Andrew P. Dickerson

University of Warwick - Institute for Employment Research (IER) ( email )

Coventry CV4 7AL
United Kingdom

Heather D. Gibson

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece
+301 32 35 803 (Phone)
+301 32 33 025 (Fax)

Athens University of Economics and Business

76 Patission Street
Athens, 104 34
Greece

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